[Senate Hearing 111-159]
[From the U.S. Government Publishing Office]
S. Hrg. 111-159
CURRENT ISSUES IN DEPOSIT INSURANCE
=======================================================================
HEARING
before the
SUBCOMMITTE ON FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
STRENGTHENING DEPOSIT INSURANCE AND REVIEWING INCREASING THE FDIC AND
NCUA'S BORROWING AUTHORITY FROM TREASURY
__________
MARCH 19, 2009
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html
----------
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Colin McGinnis, Acting Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Financial Institutions
TIM JOHNSON, South Dakota, Chairman
MIKE CRAPO, Idaho, Ranking Member
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York KAY BAILEY HUTCHISON, Texas
EVAN BAYH, Indiana JIM BUNNING, Kentucky
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
JON TESTER, Montana JIM DeMINT, South Carolina
HERB KOHL, Wisconsin
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Laura Swanson, Staff Director
Gregg Richard, Republican Staff Director
(ii)
C O N T E N T S
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THURSDAY, MARCH 19, 2009
Page
Opening statement of Senator Johnson............................. 1
Prepared statement........................................... 26
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 1
WITNESSES
Art Murton, Director, Division of Insurance and Research, Federal
Deposit Insurance Corporation.................................. 2
Prepared statement........................................... 26
David M. Marquis, Executive Director, National Credit Union
Administration................................................. 4
Prepared statement........................................... 30
William Grant, Chairman and CEO, First United Bank and Trust, on
behalf of the American Bankers Association..................... 13
Prepared statement........................................... 38
Terry West, President and CEO, Vystar Credit Union, on behalf of
the Credit Union National Association.......................... 14
Prepared statement........................................... 42
Stephen J. Verdier, Senior Vice President and Director,
Congressional Relations Group, on behalf of the Independent
Community Bankers of America................................... 16
Prepared statement........................................... 46
David J. Wright, CEO, Services Center Federal Credit Union, on
behalf of the National Association of Federal Credit Unions.... 18
Prepared statement........................................... 51
(iii)
CURRENT ISSUES IN DEPOSIT INSURANCE
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THURSDAY, MARCH 19, 2009
U.S. Senate,
Subcommittee on Financial Institutions,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:05 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Tim Johnson (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. As we all know, the economic landscape has
undergone significant change since the Committee last looked at
deposit insurance. In these times of economic instability, it
is increasingly important that we have a strong and stable
deposit insurance fund and that our regulators have the tools
they need to wind down failed institutions while at the same
time guaranteeing that Americans' savings and retirement remain
safe. I am pleased to hold this hearing today to take a closer
look at deposit insurance issues that the FDIC, the National
Credit Union Administration, and our Nation's banks and credit
unions currently face. I would also like to welcome our panel
of witnesses, and thank them for their time and for their
thoughtful testimony.
We are waiting for Ranking Member Senator Crapo to show up.
I have some urgency in that Harry Reid has announced that we
will have a vote around 4 o'clock, and so we intend to wrap up
about then.
I would like to welcome our first panel of witnesses. Our
first witness is Mr. Art Murton, Director of the Division of
Insurance and Research at the Federal Deposit Insurance
Corporation. Welcome.
Our second witness is Mr. David Marquis. Mr. Marquis is the
Executive Director of the National Credit Union Administration
and the former head of NCUA's Examination and Insurance
Division. Welcome.
I will ask that the witnesses please limit their testimony
to as close to 5 minutes as possible. Your full statement and
any additional materials you may have will be entered into the
record.
Mr. Crapo, do you have any comments?
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman. Sorry for
being late. I am out of breath from running to get here.
First of all, I want to welcome our witnesses and everyone
here today. Thank you, Mr. Chairman, for holding this hearing.
Looking at today's economic climate and the threats that
face us in the financial industry, we have to consider the
possibility that we could have one or more major financial
institution failures. This is not an acknowledgment that it
will happen, but it is an acknowledgment that there is a threat
or a risk present.
The FDIC and the NCUA protect against the loss of insured
deposits if a Federal insured bank, savings association, or a
credit union fails. It is important to note that the depositors
who have accounts at failed banks or credit unions are made
whole by the insurance fund at either FDIC or NCUA that banks
and credit unions pay into. It is essential that this remains
the case, and I am going to oppose any efforts to change that.
In order to make sure that the FDIC and the NCUA can
immediately access the necessary resources to resolve failing
banks and credit unions and provide timely protection to insure
depositors, I support increasing the borrowing authority of
both the FDIC and the NCUA.
I am a cosponsor of S. 541 with Senator Dodd and others
that would permanently increase the FDIC authority to borrow
from the Treasury, increase that authority from $30 billion to
$100 billion. I note that it has been a long time since that
borrowing level has been increased.
In addition, the bill would temporarily authorize an
increase in borrowing authority of about $100 billion, but not
to exceed $500 billion, based on a process that would require
the concurrence of the FDIC, the Federal Reserve Board, and the
Treasury Department, in consultation with the President.
I look forward to hearing today from our witnesses about
what would be the appropriate parallel authority to provide to
NCUA. It is my hope that we will decide not to try to add
controversial items like the bankruptcy cram-down provisions or
others into this effort, which will only delay our ability to
provide the additional necessary resources to address future
contingencies.
Again, Mr. Chairman, I appreciate your holding this
hearing. I look forward to working with you and hearing from
our witnesses.
Senator Johnson. Mr. Murton, please begin.
STATEMENT OF ART MURTON, DIRECTOR, DIVISION OF INSURANCE AND
RESEARCH, FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Murton. Thank you. Chairman Johnson and Ranking Member
Crapo, I appreciate the opportunity to testify today on behalf
of the FDIC.
By protecting deposits, the FDIC protects the most
important source of funding available to banks--funds that can
be used to provide credit to communities and the broader
economy.
While many sources of bank funding have pulled back during
the past 6 months, deposits have not. They remain a stable
source of funding because depositors know that insured deposits
are absolutely safe.
My testimony will discuss the condition of the Deposit
Insurance Fund and the need for an increase in the FDIC's
borrowing authority. I will also comment on other current and
potential changes to the deposit insurance system.
At the beginning of 2008, the Deposit Insurance Fund had a
balance of $52 billion. By the end of the year, the balance had
declined to $19 billion. The decline was caused by the costs of
protecting depositors of banks that failed last year and by the
reserves that we set aside to cover the expected costs of bank
failures this year.
Last October, the FDIC Board, as required by law, put in
place a plan to restore the insurance fund to a target range
within 5 years. Based on projections at that time, the
restoration plan called for banks to pay higher premiums.
Recently, the FDIC updated those projections, and because of
continued deterioration in the financial system, our estimated
losses are significantly higher. As a result, the FDIC's Board
of Directors made a series of difficult decisions to ensure
that our deposit insurance system remains sound. Most
importantly, the Board adopted an interim rule setting a
special assessment of 20 basis points.
These increases in assessments are necessary to ensure the
adequacy of the FDIC's industry-funded resources. The FDIC's
guarantee--for 75 years--has always been funded by the
industry. Deposit insurance has been an important source of
stability during our current financial crisis, and it has not
relied on taxpayer funding.
The FDIC realizes that these assessments are a significant
expense, particularly during a financial crisis and recession
when bank earnings are under pressure. And we recognize that
banks face tremendous challenges right now, even without having
to pay higher assessments.
So let me turn now to our borrowing authority. While the
FDIC is an industry-funded program, the FDIC guarantee is
backed by the full faith and credit of the U.S. Government. In
light of this, Congress has always provided the FDIC with a
line of credit with the U.S. Treasury.
The FDIC's borrowing authority was last raised by Congress
in 1991 to $30 billion and has not been raised since then.
Meanwhile, in the banking industry, assets have grown. They
have tripled from $4.5 trillion to close to $14 trillion, and
the FDIC believes it is necessary to adjust the line of credit
to reflect that growth.
The Depositor Protection Act of 2009, S. 541, would
increase the FDIC's authority to borrow from Treasury from $30
billion to $100 billion. As Senator Crapo mentioned, it would
also allow a temporary increase above $100 billion, but not to
exceed $500 billion, based on a process that requires the FDIC
Board, the Federal Reserve Board, and the Secretary of
Treasury, in consultation with the President, to make a finding
that the additional borrowing is necessary. It is important to
note that any use of that borrowing authority is required by
statute to be repaid by the banking industry.
The recent decision to impose a special assessment
reflected the FDIC's responsibility to maintain resources
sufficient to cover unforeseen losses, and the size of the
borrowing limit is critical to this decision. Chairman Bair has
stated that an increase in our borrowing authority would give
the FDIC the flexibility to reduce the size of the special
assessment.
The events of the past year have demonstrated the
importance of contingency planning to make sure the FDIC can
seamlessly fulfill its commitment to protect insured
depositors. The Depositor Protection Act would ensure that the
FDIC will continue to have the resources necessary to address
future contingencies. The FDIC strongly supports this
legislation and looks forward to working with the sponsors to
enact it into law.
Now let me just turn briefly to the FDIC's systemic risk
exception and how the costs of it are paid.
As you know, current law authorizes the FDIC to take
extraordinary actions in certain circumstances to protect the
financial system and the economy from systemic risk and to
recover the costs of that action through a systemic risk
assessment on banks.
The FDIC's recent experience suggests that we do not have
sufficient flexibility to allocate any such assessment fairly
among the parties who benefit. For example, recent actions
taken under the systemic risk authority have benefited parties
who are not subject to any assessment by the FDIC.
The statutory language in H.R. 1106 would address this by
allowing the FDIC to impose systemic risk assessments on
parties that benefit from the systemic risk exception,
including bank holding companies.
The last area that I will comment on is the level of
deposit insurance coverage. With regard to proposals to make
permanent the current temporary increase in deposit insurance
coverage to $250,000, the FDIC believes that the level of
deposit insurance coverage is a policy determination that
appropriately should be made by Congress. However, because any
increase in the level of deposit insurance coverage increases
exposure of the fund, such a change must also permit the FDIC
to account for the newly insured deposits when setting premiums
necessary to maintain the fund.
In conclusion, the events of recent months have clearly
demonstrated the benefits of deposit insurance. Assured by this
guarantee, consumers have continued to maintain deposits in
insured financial institutions that have provided vital credit
for communities across the country. With additional
modifications to the deposit insurance system, such as the
increase in the FDIC's borrowing authority, we can maintain a
system that continues the FDIC's mission of providing stability
to the financial system.
Thank you, and I look forward to your questions.
Senator Johnson. Mr. Marquis.
STATEMENT OF DAVID M. MARQUIS, EXECUTIVE DIRECTOR, NATIONAL
CREDIT UNION ADMINISTRATION
Mr. Marquis. Thank you, Chairman Johnson, Ranking Member
Crapo. Good afternoon. The National Credit Union Administration
appreciates this opportunity to provide the agency's position
on ``Current Issues in Deposit Insurance.'' Federally insured
credit unions comprise a small but important part of the
financial institution community, and hopefully NCUA's
perspective will add to the understanding of issues relating to
Federal insurance at this critical juncture.
Recent events underscore how important Federal insurance is
to consumers, and the National Credit Union Share Insurance
Fund has played a valuable role in reassuring credit union
members that their federally insured funds are safe to
$250,000. I would like to confine my oral statement to a few
key points.
First, NCUA supports the permanent increase in Federal
deposit insurance to $250,000. Reverting to the pre-2008 level
of $100,000 would likely have a negative effect on consumer
confidence at this time when federally insured depositories
such as credit unions are appropriately seen as a port in the
storm.
Second, NCUA supports the extension of the period of time
the agency has to assess a premium to restore the NCUSIF to its
statutory minimum. Currently, the Federal Credit Union Act
requires credit unions to pay a premium in the event the NCUSIF
equity ratio falls below the 1.2 percent. That premium to
restore the level must be collected in the same year as the
decline. NCUA believes that extending the time the agency has
to restore the equity level from 1 year to 5 years would
provide important flexibility for credit unions. A premium
assessment would occur during a period of economic difficulty
when credit unions could least afford it. This in turn reduces
the amount of dollars credit unions can lend to their members,
which stimulates and supports the economy in a very direct way.
A 5-year period is a sensible way to address this strain on
credit unions without sacrificing the financial soundness of
the insurance fund.
Third, the authority of NCUSIF to borrow from the Treasury
has remained at $100 million since the inception in 1970--this
despite significant growth in industry assets and insured
funds. Borrowing authority is vital because the insurance
fund's cash needs could far exceed expected losses during
difficult periods. In the event of a failure of a large
institution, NCUA might need to properly pay out all the
insured shares, which would exceed available liquidity
resources. The maintenance of public confidence in this kind of
extraordinary event strongly suggests that Congress update the
NCUSIF figure to a more realistic and useful number, given the
size of the industry today versus what it was in 1970.
A recently passed House bill has a provision that would
increase the NCUSIF borrowing authority to $6 billion. This
figure is an appropriate reflection of the growth in the
industry today. Furthermore, emergency borrowing authority,
such as the one that Chairman Crapo recently put into
legislation for the FDIC in a multiple of 5 times ordinary
borrowing authority, would be an important contingency tool in
the event of further dislocations in the market. NCUA views
these increases as a vital step in our effort to maintain a
stable insurance fund for credit union members.
Finally, Congress should consider providing NCUA with
systemic risk authority similar to the FDIC. This enables FDIC
to provide assistance to banks in emergency situations subject
to concurrence by the Treasury and the Fed. NCUA has certain
tools available to it, but these tools are very limited by
statute and too narrow in focus in the event of a broad, large-
scale financial dislocation like the one we are now
experiencing.
NCUA does not have sufficient ability to respond when
certain extraordinary circumstances threaten to undermine
confidence in the credit union system as a whole. During some
of the recent disruptions in the corporate credit union system,
for example, NCUA was forced to resort to makeshift, burdensome
share guarantee programs that, while workable, required a
complicated execution of agreements between the NCUA Board and
the corporate credit unions. Given the size and complexity of
the adverse events that can occur, broader, more direct
remedies available through a systemic risk authority are
needed.
The problem facing our financial markets and the
institutions that serve them are real, but so is the safety and
stability provided by a sound and well-functioning Deposit
Insurance Fund. NCUA is working to give consumers a significant
measure of reassurance during these troubled times. NCUA's
hearing and legislative process before you represent an
appropriate opportunity for Congress to identify and act on
important improvements that will make a good system even better
for the Nation's consumers.
Thank you, and I will be glad to answer any questions.
Senator Johnson. Thank you, Mr. Marquis.
Mr. Murton, in addition to the potential increase in costs
because of increased coverage, FDIC has increased premiums to
restore the DIF as part of the restoration plan and announced a
special assessment. How does the FDIC intend to address the
concern that the special assessment and other costs will
unfairly affect small banks, particularly those that played by
the rules and did not contribute to our current economic
crisis?
Mr. Murton. Yes, thank you. The FDIC has proposed higher
premiums. As you know, and as I said in my statement, the
insurance fund that we administer has been declining over the
last year or so and falling well below the target range.
We have always been an industry-funded deposit insurance
system, and we think it is important to maintain that status,
and the banks that we talked to agree with that.
We feel that it is important now to maintain a cushion for
any contingencies, and that is why we are asking for increased
borrowing authority.
We recognize that the higher premiums that we are asking
banks to pay come at a difficult time, and the FDIC Board has
always struggled at times like this with the tradeoff between
maintaining a sound deposit insurance fund, on the one hand,
and allowing banks to have the funds necessary to meet the
credit needs of their community.
What the board has proposed has tried to strike that
balance, but we have also indicated that if our special
borrowing authority were increased, we think we would have
enough of a cushion so that we could lower the special
assessment. So that is one thing that we are trying to do.
We have also recently, as part of our guarantee, our
temporary guarantee program, we recently changed the fee
structure of that, so we are shifting more of the fees toward
the larger users of this guarantee program, and those
additional funds will be placed into the DIF, and that will
allow us to offset some of the special assessment.
In terms of the community banks that have played by the
rules, we have made some changes to our risk-based premium
system, which was part of the legislation in 2006. We have
asked as part of our risk-based pricing system for the banks
that are taking on more risk to pay more of the burden, and for
those traditional banks that have basically stuck to their
knitting to pay less of the burden. So we are trying to address
those very legitimate concerns.
Senator Johnson. Mr. Marquis, does the NCUA have a concern
about the equity levels in credit unions that they need
emergency borrowing authority? The Treasury Department has said
that it supports an increase in FDIC's emergency borrowing
authority. Does the Treasury feel the same way about increasing
NCUA's emergency borrowing authority?
Mr. Marquis. Our borrowing authority right now is limited
to $100 million, and at the time when that was enacted in 1970,
the credit union industry had total deposits of $13 billion.
Today, the credit union industry has assets of a little bit
greater than $800 billion, so that is 62 times the asset size.
In order to get the equivalent ability of NCUA and the
insurance fund to act on issues of need in terms of payouts, we
would have to go to $6 billion in order to equal that
equivalent. I do not know if the Treasury supports that. To my
knowledge, we are not sure. I am not sure that is the case. But
as we wrote this for this hearing, we did talk to some of the
members, at least a pack of folks did, members of the Committee
on the House side, and tried to come up with a reasonable
number that kind of mimicked or matched what the FDIC was and
kind of where we were in relationship to what the size of the
industry was back in the 1970s.
Senator Johnson. Do you both agree that the temporary
increase in deposit insurance to $250,000 should be extended
beyond 2009? Should the increase be made permanent?
Mr. Marquis. Yes, we believe it should be made permanent.
Again, the last time this issue was looked at was in 1980 when
the $100,000 was established. Looking on it on an inflation-
adjusted basis, that would bring us to about 243. Prior to
that, in the 1970s, the insurance limit was $40,000. We think
this would allow some of the small credit unions, medium-sized
community credit unions to be able to generate more deposits in
the smaller institutions in the home towns and hopefully keep
the money for credit available in those locations as opposed to
spreading it out in the branches in the real large
institutions.
We think this is helpful to especially the community credit
unions and smaller credit unions and helping them to--
basically, it would help us from insurance and spread out the
systemic risk in that it would more be--it would have the
opportunity to let folks that start out in credit unions in
their 20s, and then by the time they get into their 70s, they
do not want to keep $100,000, so they turn in their home town
and have to go put it somewhere else, and this would allow them
to stay with their institution and keep a little more money
there.
Senator Johnson. Mr. Murton?
Mr. Murton. Yes, the FDIC has always taken the position
that the level of deposit insurance coverage is an important
policy call for Congress to make, and the FDIC understands that
there are tradeoffs on both sides of that issue.
If the increase in the guarantee is made permanent to
$250,000, we would ask that the FDIC be able to take that into
account in setting our reserves or our premiums in order to
maintain the fund.
Senator Johnson. Mr. Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
For both of you, right now both the banks and the credit
unions are facing the impact of special assessments as a result
of FDIC's and NCUA's efforts to maintain adequate resources. As
we are all painfully aware, these special assessments are
creating a concern about the financial impact on our financial
institutions at a time when they really need to have as much
bang for the buck in terms of providing credit as possible.
The question I have is--well, further in that context, it
is my understanding that the increased borrowing authority that
both of you are talking about would be able to provide both the
FDIC and the NCUA some pathways to relieving that pressure. And
the question I have is: First, how does the increased borrowing
authority really help you relieve that pressure on the
assessments? And, second, what would be some of the unintended
consequences if Congress delays action on this borrowing
authority issue? Mr. Murton or Mr. Marquis, whoever wants to go
first.
Mr. Murton. Yes, I will take it. We are asking for the
increased borrowing authority, and we do think that will help
to allow us to set a lower special assessment. Basically, our
insurance fund has been declining, and as a result, the cushion
that we have for contingencies, for unforeseen circumstances,
has been getting smaller. And the borrowing authority is part
of that cushion for the contingency.
So if Congress sees fit to increase our borrowing authority
to keep pace with the growth in the industry over the last 25
years, then the board can take more comfort in allowing the
lower special assessment and allowing the fund to go somewhat
lower.
If we do not, if Congress does not act quickly, the board
does have to make a decision soon on the special assessment. We
are planning to go to the board in mid- to late May, and the
board will have to decide whether to keep the 20-basis-point
special assessment in place. And so action soon enough to allow
that decision to be affected would be welcome.
And then, as I say, the line of credit is for
contingencies, and given the circumstances that we are facing,
there are a number of contingencies that we may face.
Senator Crapo. Thank you.
Mr. Marquis.
Mr. Marquis. Thank you. As you know, the insurance fund for
NCUSIF is structured in a way where the first 1 percent that
credit unions are required to deposit is an asset on their
balance sheet and it is not a premium. The other part of the
Share Insurance Fund is equity that we built up over time and
allowed us to go to 1.3 over time, over the past several years.
The borrowing authority gives us the ability to have cash
needs for payout priorities or payout issues should those
issues arise, which we are not anticipating at this point. But
the 1 percent, if we have an issue that causes us to reserve or
to fund for anticipated losses, still does impact the Share
Insurance Fund 1 percent because it is an impaired asset,
because it was never collected as a premium. So accounting-
wise, that does cause an impairment, and currently, at our
January 28th meeting, we did have to reserve a significant
amount of money for some issues, and that caused our Share
Insurance Fund to go down to about 0.51, and that is going to
trigger a premium later on in this year.
Senator Crapo. So if I understand both of you correctly,
decisions have to be made relatively soon with regard to the
special assessments, and the failure to be able to rely on the
increased borrowing authority could cause higher assessments,
and that in turn would reduce our ability to get more cash into
credit markets than into these types of assessment funds.
Correct?
Mr. Murton. That is correct.
Senator Crapo. The point I am trying to get at here is the
longer Congress takes to act, the greater the threat to our
system, or maybe to put it a different way, the less likelihood
we will--or the less opportunity we will have to be able to
free up more credit in the banks and credit unions for the
public sector--the private sector.
Mr. Murton. That is absolutely right.
Senator Crapo. All right. Could you each just quickly go
through with me the process that would be followed if there
were a failure of a credit union or a failure of a bank? And
what I am getting at is this: I think it is very important for
the public to understand that these dollars are--even if the
loans have to be accessed, ultimately the funds that would be
used for the insurance protection here are going to come from
the industry itself, and that is the point that I wanted to get
at from both of you.
Mr. Marquis. Yes. The process of putting a credit union
into receivership and liquidation is one that we take over the
institution and pay it out, all the share deposits, within a
couple days in order to maintain confidence in the system. That
is a cash drain, of course, on the Share Insurance Fund.
Then a process takes place in terms of recovery of assets
on the other side of the balance sheet, which is a long, drawn-
out process at times as you try to liquidate the assets, or
sell them or merge them or what have you. So that does take--
and the loss ultimately takes capital out of the system which
reduces the premium charge, which reduce the ability of a
credit union to extend more credit in the market because they
have to contract their balance sheets in order to meet their
capital requirements.
Senator Crapo. Thank you.
Mr. Murton. Yes. When an FDIC-insured bank fails, we are
able to resolve it quickly without interruption to the funds
for depositors.
Senator Crapo. So the depositors in both cases get their
funds protected within days?
Mr. Murton. Absolutely. Usually the next business day. In
virtually all cases, there is no interruption to their funds.
Senator Crapo. All right. Continue.
Mr. Murton. And so in order to be able to do that, we need
cash, we need to have the cash available to do that. And this
borrowing authority helps us to make sure that we have the cash
for whatever contingencies. To pay back that borrowing, we pay
it back through the collection from the assets that we get from
the failed bank, but also through the premiums that we assess
on the banks. And we have always been able to pay--we have only
borrowed from the Treasury once, and that was for short-term
liquidity needs, and we paid that back within 2 years.
But any resources that we use and any losses that we incur
as a result of a bank failure are paid for through assessments
on the banking industry.
Senator Crapo. So the bottom line is in both cases the
depositors are protected immediately, the taxpayers ultimately
do not end up holding the bill for the protection that is
provide.
Mr. Murton. That is right.
Mr. Marquis. Correct.
Senator Crapo. Thank you.
Senator Johnson. Chairman Dodd.
Chairman Dodd. Well, first of all, Senator Johnson, let me
thank you and Senator Crapo for doing this. I appreciate it
very much. We almost ran into each other. The hearing this
morning went a little long because of votes. I thought we would
be done much earlier. So we were leaving the room as you were
coming in the room. So I want to thank you very much for
holding this very important hearing, because we have got to in
the coming days here now--we are trying to resolve some matters
which I--we will either resolve or we will not. One way or the
other, we will move forward. But Senator Johnson and Senator
Crapo have been tremendously supportive of the idea of a need
for doing what we need to be doing. I guess it goes back some
time. Actually, we have been living with the $30 billion
ceiling since 1991, so for the last almost--you know, number of
years here, 20 years we have had people talking about the need
to move up. And obviously the situation we are in I think makes
that point very loudly to us. And dealing, obviously, with
raising statutorily to the 250 also makes a great deal of sense
as well. And then the issues related with it I think are
important.
And let me just--I just have a couple of quick ones for
you. There have been some concerns raised about our current
system of collecting premiums for deposit insurance, that is,
it is procyclical, that is, banks are charged more for deposit
insurance during economic downturns, which is exactly when they
can least afford to pay them. And so I wonder what we can to
minimize this procyclical impact of deposit insurance
assessments, because obviously we heard it again today. Senator
Bunning was talking about assessments in his State. I do not
know if you heard his comments, but talked about a 1,000-
percent increase in premium costs. Sheila Bair was willing to
sit down and talk about that particular case. But, nonetheless,
that assessment, according to Senator Bunning, would make it
impossible for that lending institution in his home State of
Kentucky to make a profit based on that cost.
So I wonder if you might respond to this issue of how we
can maybe think about a more creative way. Mr. Murton, we will
start with you.
Mr. Murton. The issue of procyclicality----
Chairman Dodd. Is that microphone on?
Mr. Murton. Sorry. Yes, sorry. The issue of procyclicality
has been one that the FDIC has dealt with for a number of
years, and, in fact, for a number of years we had a system that
was more procyclical. It required us to charge whatever it took
to get the fund back up to a target of 1.25 within a year.
The legislation that passed in 2006, which Senator Johnson
was a strong advocate for, helped with that situation, and
because that law was passed, we have not had to charge the high
premiums for the last 2 years. We have been able to allow
premiums to be lower than they otherwise would.
But we are at a time where the fund has declined, and it
has declined so that the cushion that we have is getting
uncomfortably small, and that is why the borrowing authority,
the increase in the borrowing authority will help to alleviate
some of that pressure and allow the board to lower the special
assessment.
We are looking at other ways to try to address the special
assessment. We have, as I indicated, changed the fee structure
for the guarantee program that we have put in place, and we
have raised some of the fees for that, and we are going to put
them in the deposit insurance fund, so that will help lower the
special assessment. And we have also put in place a risk-based
pricing system where riskier banks are asked to pay more than
the safer banks. So we are trying to take steps to lower the
impact on the industry at what is probably one of the worst
times for them to be facing.
Having said that, it is important to maintain an industry-
funded program. We feel it is very important, and the banks
that we have talked to feel that is an important feature of
deposit insurance.
Chairman Dodd. I appreciate that. One more question. I will
ask you, Mr. Marquis, for the answer. On the second panel, Mr.
Wright, who is from the National Association of Federal Credit
Unions, and Mr. West from the Credit Union National Association
expressed concerns over the increased assessments resulting
from the National Credit Union Association's Corporate
Stabilization Plan announced earlier this year to mitigate the
cost to credit unions. Both witnesses propose allowing
corporate credit unions to access the central lending facility
and making the central lending facility available for capital
as well as liquidity.
I wonder if you could share what your organization's
position is on this proposal. And if you are not for it, why?
And what alternatives would you suggest?
Mr. Marquis. NCUA supports the concept of trying to find a
way for credit unions to mitigate the cost of having to
recapitalize the 1-percent deposit all at one time. However, we
also are mindful that we want a program that is not going to
create further problems. Credit unions built their insurance
fund--or built their portfolios up of capital from 1992, the
last time we charged a premium, from about 6.4 percent to 11.5
percent. So their balance sheets are very healthy during the
good times.
The Share Insurance Fund at that time was maintaining a
rate of about 1.3, and it cannot charge a premium beyond that
point. We have to give it back once it goes--or we do not have
to give it back, but we cannot charge a premium.
On the CLF issue, the CLF is established for liquidity
purposes, and it is funded through--its borrowing authority is
set out in a multiple of its capital. It can borrow 12 times
its subscribed and paid-in capital. So today that is $41
billion.
If we were allowed to put in capital instead of liquidity
into an institution that would be at risk or the capital would
be subject to covering an insolvent institution, that capital
would be impaired, and impaired on the CLF books as well, on
its capital. That in turn would reduce the borrowing authority
from the CLF, and if you had an insolvency or a capital
position that got impaired to the tune of about $3.4 billion,
it would wipe out the borrowing authority altogether.
On the other hand, the additional would be the capital for
the most part is subscribed for credit unions on behalf of them
through our largest corporate, U.S. Central, and if that
issue--or if that capital was impaired, it would further impair
the capital of that institution and further put that
institution in harm's way.
So those issues make it somewhat problematic, at least the
way the structure of the CLF is currently written, not that
that could not be adjusted, but you have to make some
significant changes on how the CLF authority is established in
terms of how its borrowing authority is set out.
I know our Chairman is working with staff, and we are due
to give him something to present to our board on Tuesday as a
possible way that this could be done to mitigate that issue, a
proposal that might work through a stabilization fund on top of
the Share Insurance Fund. But he has to vet that with his other
board members before he is ready to present it to Congress.
Chairman Dodd. Thank you very much.
Thank you, Mr. Chairman.
Senator Johnson. I would like to thank our first panel of
witnesses for taking the time the time to testify today on this
important issue. You may be excused for the second panel.
Now I would like to welcome our second panel of witnesses
to the table. Thank you for being here today to discuss such a
timely and important matter.
[Pause.]
Senator Johnson. Our first witness is Mr. William Grant.
Mr. Grant is Chairman and CEO of First United Bank and Trust in
Oakland, Maryland. He is here today on behalf of the American
Bankers Association. Welcome.
Our second witness is Mr. Terry West, President and CEO of
VyStar Credit Union in Jacksonville, Florida. He is here today
on behalf of the Credit Union National Association. Welcome.
Our third witness is Mr. Steve Verdier, Senior Vice
President, Independent Community Bankers of America. Welcome.
And last, Mr. David Wright. I have known Mr. Wright for
many years. He is CEO of Services Center Federal Credit Union,
which serves the communities of Yankton, Parkson, and
Springfield in South Dakota. Thank you for being here today on
behalf of the National Association of Federal Credit Unions,
and thank you for traveling all this way.
Mr. Grant, please begin.
STATEMENT OF WILLIAM GRANT, CHAIRMAN AND CEO, FIRST UNITED BANK
AND TRUST, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Mr. Grant. Chairman Johnson, Ranking Member Crapo, and
other members of the Subcommittee, First United Bank and Trust
is a 108-year-old community bank headquartered in Oakland,
Maryland, a rural town in Appalachia with a population of about
2,000. We have assets of about $1.6 billion and serve four
counties in Maryland and four counties in West Virginia.
The ABA strongly supports, with the sponsorship of Chairman
Dodd, the Depositor Protection Act of 2009, S. 541. It would
provide the FDIC with the needed funds to manage the cash-flows
in handling bank failures, and more importantly, this added
flexibility would allow the FDIC to significantly reduce the
special assessment on the industry that has been proposed for
June 30, 2009.
Let me be very clear. The banking industry fully supports a
strong FDIC Fund. We know how important deposit insurance is to
our customers, and banks have always paid the full cost of the
FDIC since its inception in 1933 and we will honor the
obligations to support it today. How this is done, however, is
very important to every bank in all communities across the
country.
The special assessment, as currently proposed, would pull
$15 billion from banks in the second quarter of this year. This
would be on top of the regular quarterly payments of about $4
billion. Even at half of that cost, and that is what the FDIC
has suggested is likely if S. 541 were enacted, there would
still be a substantial burden on banks at the very time we are
making every effort to get credit into our local communities.
The money to pay such high assessments cannot come out of
thin air. It is very important, therefore, to lower the up-
front costs and to spread the obligation to FDIC over time.
Happily, S. 541 helps to accomplish this.
For my bank, First United, the proposed special assessment
would cost $2.5 million, to be paid all in the second quarter
of 2009. This will reduce our bank's capital, which is
necessary to support lending, by about $1.6 million. This very
high and unexpected cost is in addition to the regular risk-
based premium, which will total about $1.7 million in 2009.
First United is not alone. All banks face similar challenges.
I do want to be very clear in saying that First United Bank
and Trust will meet its obligations to the FDIC regardless of
whether S. 541 is enacted. In doing this, however, we would
encounter limits on our ability to lend in our communities,
support local functions and charities, and to provide jobs. In
fact, the special assessment is completely at odds with our
bank's efforts to help our communities rebuild from this
terrible economic downturn.
This assessment would also make it more expensive to raise
new deposits, and fewer deposits means less lending. The
subsequent reduction in earnings will make it harder to build
capital when it is needed the very most.
In places where the economic conditions are even more
severe, this added burden will make new lending practically
impossible. Some banks have reported that they may have to
consider reducing bank staff in order to pay this new
additional assessment.
It is critical to consider alternatives that would reduce
this burden. S. 541 does this by enhancing the FDIC's ability
to draw on its line of credit. Importantly, the FDIC does not
intend to use this line of credit at all unless the economy
deteriorates even more dramatically than is anticipated. And if
it does draw on the line, it is a borrowing that will be repaid
by the banking industry with interest.
This obligation of our industry is often lost in the
discussions about government support and is frequently confused
with taxpayer losses. America's banks are prepared to do our
part and pay for 100 percent of the cost of FDIC insurance. The
only issue is one of timing. S. 541 will be very helpful in
providing the industry with the time needed to fund the FDIC
Insurance Fund while enabling the industry to meet its needs
within the communities.
Therefore, the ABA fully supports S. 541 and urges quick
action to enact it into law.
Mr. Chairman, I would be happy to answer any questions that
you or the Subcommittee might have. Thank you.
Senator Johnson. Mr. West?
STATEMENT OF TERRY WEST, PRESIDENT AND CEO, VySTAR CREDIT
UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION
Mr. West. Thank you, Chairman Johnson and Ranking Member
Crapo. I appreciate the opportunity to be before you this
afternoon and represent the Credit Union National Association.
I am President and CEO of VyStar Credit Union, headquartered in
Jacksonville, Florida. We were founded in 1952 with 12 people
and $60 to serve members, provide them a place to borrow money
and save money. I am proud that 57 years later, we still do
that every day.
We today serve 350,000 members and they have $3.8 billion
in assets in their credit union. We provide a full range of
services to those members. Last year alone, we loaned out over
$300 million in mortgage loans for them. And Senator Crapo, I
heard your comments about lending. We think it is important.
Today, we have over $200 million in our mortgage loan pipeline
that we are hoping to close in the next couple of months. Most
of that are members refinancing mortgages from other
institutions at lower rates to our institution. We also pay up
to $5,000 in closing costs for those members so that they will
have a better opportunity to get into those loans.
We also serve about 9,000 businesses in the area. Many of
them have their deposit accounts with us because we charge them
less fees. They also have small business loans with us.
I also Chair CUNA's Task Force on Corporate Credit Unions
that Mr. Marquis referenced earlier, and our charge on that
task force has been to look at the corporate credit union
structure and advise NCUA, and hopefully Congress, and
hopefully the Treasury, on how to properly restructure them in
the future.
A couple of things I would like to mention as we talk
today, and as we said, this is a very important and timely
meeting. The banks currently have some pending bills to
increase the deposit coverage up to $250,000. They have pending
bills to rebuild their FDIC Insurance Fund, which we very much
agree. At present, they have 5 years to rebuild their fund, and
as Mr. Marquis said, we have 1 year to rebuild our fund.
According to what we have read, FDIC recently has extended that
to 7 years and they are asking for 8 years. We would ask that
the credit union movement have at least 8 years to rebuild our
fund, as well. And Mr. Marquis had mentioned five. Five would
help, eight would be better.
We also recognize that FDIC has asked for increased
borrowing authority. We as credit unions are asking for
assistance, as well. In general, we are operating well. I am
proud to say we had net income last year, and we are in
Florida, one of the toughest States in the Nation economically
right now. We are asking that we also have $250,000 in
insurance coverage. I talked with members, and it may be a
surprise, we have 350,000. I talk with them daily and weekly.
That is how I run our credit union.
They are constantly asking us, will this coverage be
permanent, and they think it needs to be permanent and I think
it needs to be permanent, because every day, they are wanting
to feel more secure in this economic environment. They come in
not worried about their credit union, but worried about the
money they have been working hard to save. Anything we can do
to give them a comfort during this environment, I think is
important.
Mr. Marquis talked about the Central Liquidity Fund, or
Central Lending Fund. We also believe that natural person
credit unions and corporate credit unions should be able to
borrow from that and use it as a source of capital, and Mr.
Marquis talked about the structuring that would need to occur
in how it is set up. We think that would provide considerable
relief to the credit union movement.
We also support NCUA having the ability to increase their
borrowing from $100 million to $6 billion during this, and we
also support them having the same authority that FDIC has today
in systemic risk issues. Today, NCUA does not have that
authority. We also support them having the authority during
systemic risk issues to borrow up to $30 billion.
Mr. Marquis touched on the corporate credit union issue,
and as chairing that committee, I will give you a little more
insight into that. U.S. Central is the largest corporate credit
union in the nation. Earlier this year, late 2008, they had to
experience an other than temporarily impaired write-down of
$1.2 billion for investments that they purchased that were AAA-
rated because of mark-to-market issues. The resulting issue in
that is, as Mr. Marquis addressed, brought the Share Insurance
Fund down to 0.49 percent to write down that amount of money to
boost their capital with $1 billion and also to cover with a
guarantee the uninsured deposits at corporate credit unions.
The impact to credit unions, on average, will be 81 basis
points of the insured shares, 58 basis points in their net
worth, and as Mr. Marquis said, we have lots of net worth. Ours
at VyStar ended the year at about 9.23 percent. When we
subtract 58 basis points from that--and I have 56 and 58 in
spaces, we aren't exactly sure--it will bring it down to about
8.5 percent. We still have plenty of net worth, but as we all
address, that is what we need during this environment.
What that will do, to put it more specifically, when this
fee is assessed this year, about 75 percent of the credit
unions in the Nation will be operating in the red. That is
going to cause undue concern for our members, even though we
can afford to take it out of our net worth.
So we are asking for any way that the Senate and NCUA could
have the authority to spread this assessment out for a longer
period of time. We actually believe that NCUA, under the
Federal Credit Union Act, has some implied authorities to
spread a portion of this assessment out over a longer than 1-
year period of time, but it is not explicit, so we are asking
for two things. Could we have explicit authority in the Federal
Credit Union Act to spread it out over 5 years if the banks
have that, or 8 years if the banks get that, and also to
encourage NCUA to take any actions they can under the implied
authority today to go ahead and take actions.
Senator Crapo, you talked about the sense of urgency. We
think it is there.
Also, we would ask that the Central Liquidity Fund be
expanded to corporate credit unions so that they could borrow
and use it as capital.
And finally, we would ask--we would hope to never use it--
there are no funds allocated for credit unions in the Troubled
Asset Relief Program, and we would ask that at least some funds
be set aside as a backstop measure if the economy continues to
worsen. We would hope to never use them, but at least to know
that the funds are there if we ever need them.
And finally, we would ask any pressure that the Senate
could put on FASB to work on mark-to-market issues. That seems
to be part of what we are all dealing with today. I know if I
sell my house tomorrow, it is worth whatever it is purchased
for. If I sell it in 5 years, it is worth what it is purchased
for.
So I appreciate greatly the opportunity to talk with you. I
will be happy to answer any questions you have.
Senator Johnson. Mr. Verdier?
STATEMENT OF STEPHEN J. VERDIER, SENIOR VICE PRESIDENT, ON
BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. Verdier. Chairman Johnson, Ranking Member Crapo, I am
Stephen Verdier, the Senior Vice President and Director of
Congressional Relations for the Independent Community Bankers
of America. I am pleased to represent ICBA and its 5,000
community bank members at this important hearing.
Federal Deposit Insurance has helped stabilize our nation's
banking system for 75 years. It promotes public confidence by
providing safe and secure depositories for both businesses and
consumers. The deposit insurance system also protects the
funding base for community banks.
Despite the challenges that they face, the community bank
segment of the financial system is working and working well.
ICBA members are open for business, making loans, and are ready
to help all Americans weather these difficult times.
But I must also report that community bankers are angry.
Almost every Monday morning, they wake up to news that the
government has bailed out yet another ``too big to fail''
institution. On Saturdays, they hear that the FDIC has
summarily closed one or two ``too small to save'' institutions.
And now the FDIC has proposed a huge special premium to pay for
losses imposed by large institutions. This assessment and the
other inequities in the deposit insurance system will damage
community banks and the customers and small businesses that our
members serve.
ICBA believes it is urgent that Congress act quickly on
several critical deposit insurance reforms. Congress should
require the FDIC to impose a systemic risk premium against the
``too big to fail'' institutions to compensate the taxpayers
and the FDIC for the risks they impose. The depositors of the
``too big to fail'' banks have unlimited deposit insurance
coverage, giving those banks an unfair advantage.
Congress should also direct the FDIC to make the assessment
base more equitable. Community banks pay approximately 30
percent of FDIC premiums, although they hold only about 20
percent of bank assets. They fund themselves 85 to 90 percent
with domestic deposits, while banks with more than $10 billion
in assets use domestic deposits for only 52 percent of their
funding. So while community banks pay assessments on nearly
their entire balance sheet, large banks pay on only half. It
would be fairer if the FDIC were to use assets minus capital as
its assessment base.
Congress should immediately increase the FDIC's borrowing
authority, as provided in S. 541. According to FDIC Chairman
Bair, the increased borrowing authority would allow the FDIC to
reduce the special assessment to as much one-half the proposed
rate. ICBA opposes the special assessment, and my written
statement suggests viable alternatives. But unless Congress
quickly increases its borrowing authority, the FDIC will likely
vote to impose the full special assessment, perhaps within
weeks. The special assessment will have real effects on our
members' communities because community bank earnings will fall
drastically.
A recent ICBA survey reveals the FDIC's estimate of this
effect is much too low. Thirty-two percent of community banks
tell us the special assessment will consume 16 to 25 percent of
their 2009 earnings. Seventeen percent estimate it will consume
26 to 40 percent. This means that a small bank with $100
million in deposits will pay $200,000. This is unfair.
Community banks did not participate in the risky practices
engaged in by large Wall Street institutions that led to the
economic crisis, yet they are being assessed to pay for them.
Their employees, customers, and communities will all suffer.
ICBA remains committed to the principle of an industry-
funded FDIC. Under S. 541 or the other proposals we suggest,
the FDIC will still be industry-funded, but we could spread the
cost over time. The proposal to make permanent the increase in
deposit insurance coverage from $100,000 to $200,000 [sic] is
also urgent. The clock is already ticking on the CD market.
Without Congressional action, coverage on a long-term CD will
revert to $100,000 as of December 31.
ICBA also urges Congress to make permanent the unlimited
coverage for transaction accounts, which is now temporarily
provided by the FDIC. Both this program and the increase to
$250,000 have not only bolstered depositor confidence, but have
also helped community banks compete for deposits against the
``too big to fail'' banks and the money market mutual funds.
The additional coverage has helped community banks be part of
the solution to the credit crisis.
In conclusion, the ICBA urges Congress to act quickly to
shore up the FDIC and address the inequities in the deposit
insurance system. The ``too big to fail'' banks should finally
pay their fair share and community bank depositors should
continue to have the coverage they are depending on in this
troubled time.
Thank you, Mr. Chairman.
Senator Johnson. Mr. Wright?
STATEMENT OF DAVID J. WRIGHT, CEO, SERVICES CENTER FEDERAL
CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL
CREDIT UNIONS
Mr. Wright. Good afternoon, Chairman Johnson, Ranking
Member Crapo, and members of the Subcommittee. My name is Dave
Wright and I am testifying today on behalf of the National
Association of Federal Credit Unions, NAFCU.
For the last 33 years, I have been the CEO of Services
Center Federal Credit Union, headquartered in Yankton, South
Dakota. Services Center is a low-income-designated credit union
operating in six counties, four counties in South Dakota and
two in Nebraska. Services Center has some 6,200 members and
assets of $37.5 million.
I am pleased to share with the Subcommittee NAFCU's
assessment of how the National Credit Union Share Insurance
Fund, the fund, is structured and our thoughts on current
issues in deposit insurance. NAFCU believes it is imperative
that there be parity in the coverage levels between the FDIC
and the Share Insurance Fund. We believe that an aspect of this
parity has to include the ability of NCUA to have the authority
it needs to take actions to maintain the stability of the fund.
As part of the Emergency Economic Stabilization Act, Congress
increased the coverage on FDIC and NCUSIF insured accounts to
$250,000 through December 31 of 2009. NAFCU urges the Senate to
enact legislation to permanently extend this increase.
While credit unions have fared better than most financial
institutions in these turbulent economic times, many have been
impacted through no fault of their own by the current economic
environment. In particular, the corporate credit union system
has felt the biggest impact.
On January 28, the NCUA Board announced a corporate credit
union stabilization plan that would have the fund provide a
guarantee to uninsured shares at corporate credit unions. The
resulting impact on the fund will be approximately $4.7
billion, dropping the fund's equity ratio from the current 1.28
percent to an estimated 0.49 percent. Because credit unions
follow GAAP, there was an immediate impairment to the 1 percent
deposit. Federally insured credit unions had to recognize this
impairment by setting aside enough money in a contingent
liability account to bring the deposit at the fund back to a 1-
percent level.
The Federal Credit Union Act requires NCUA to assess a
premium when the fund's equity ratio drops below 1.2 percent.
That premium assessment must occur before the end of 2009, and
NCUA intends to bring the fund's equity ratio up to 1.3 percent
by assessing a premium of 0.3 percent later this year. The
consequence is that over 5,350 federally insured credit unions
will be in the red in 2009, and a number of them could face
potential additional prompt corrective action concerns.
NAFCU urges the Senate to enact a change to the Federal
Credit Union Act to establish a restoration plan period for the
fund. H.R. 1106 included such an amendment that would extend
the repayment period over 5 years. NAFCU also urges the Senate
to provide the fund an increase in borrowing authority from the
Treasury Department. This change is long overdue, since the
current level of $100 million was established in 1971 and has
not been modified for the growth of credit unions and their
members' savings over time. H.R. 1106 would increase the
borrowing authority to $6 billion and we support NCUA's request
for emergency authority up to $30 billion.
NAFCU believes that NCUA and Congress should work to find
additional ways to help stabilize the corporate credit union
system outside of using the fund. In particular, NAFCU supports
an amendment to the Federal Credit Union Act which would allow
NCUA to use funds from the Central Liquidity Facility directly
to help the liquidity and capital needs of all credit unions,
including corporate credit unions. This change, if coupled with
some form of flexibility on OTTI accounting, would go a long
way toward helping credit unions. We would welcome the
opportunity to work with the committee to address this issue.
In conclusion, NAFCU continues to support an independent
fund. Furthermore, we believe Congress must make the temporary
increase in deposit insurance coverage permanent. Actions by
the NCUA to help stabilize the corporate credit union system
using the fund threaten to put a strain on natural person
credit unions. We believe legislative relief in the form of
extending the repayment time, increasing the borrowing
authority of the fund, and modification of the Federal Credit
Union Act as it relates to the CLF are all steps that will help
the continued stability of the fund.
Thank you for the opportunity to appear before the
Subcommittee today. I welcome any questions you may have.
Senator Johnson. Thank you.
Mr. Wright, in your testimony, you propose allowing
corporate credit unions access to the Central Lending Facility
and making the Central Lending Facility available for capital
as well as liquidity. How does this benefit the natural person
credit unions you represent? Are there risks associated with
giving corporate credit unions this authority?
Mr. Wright. I believe that the corporate credit unions need
the access to the fund to be able to borrow for capital
purposes. Their capital has been severely affected by the
economic turbulence that we are currently experiencing, and
without the ability to borrow, we have had to kind of patch
together, if you will, a system whereby NCUA loaned money to
natural person credit unions, my credit union included. Then we
turned around and we invested this in the corporate credit
unions. Again, I think that there is a better way to do this
and I think the better way is to be able to have the funds go
directly from the CLF to the corporate credit unions.
Senator Johnson. Mr. West, in your testimony, you asked for
the systemic risk authority on a similar basis as that provided
to FDIC. Can you expand on why you believe the credit union
regulator needs this authority?
Mr. West. As we shared earlier, the credit union
environment in general is OK right now. What we are concerned
about is if the economy continues to worsen, and we certainly
see one or two credit unions here or there that may propose
systemic risk to the credit union industry and we feel like our
regulators should have whatever authority it needs to take care
of those situations, which would be on a limited basis. And the
concern we have is they just do not have that authority at
present.
Senator Johnson. Mr. Grant and Mr. Verdier, both of you
indicated that you opposed the special assessment announced by
the FDIC on February 27. As a member from a State with many
community banks, what impact will it have on institutions you
represent? Do you have alternative proposals to increase the
DIF while not negatively affecting your institutions? And do
you think the FDIC coverage should be applied differently to
banks that engage in more risky activities? Should the size of
the institution determine the cost and type of insurance
coverage?
Mr. Grant?
Mr. Grant. Again, Mr. Chairman, we firmly support a bank
industry-funded FDIC program. There are already steps under the
most recent legislation that vary the premiums based upon the
risk that the institution undertakes. We believe those to be
adequate.
And again, with the special assessment, we certainly
recognize the need to restore the fund to its appropriate
levels. Our concern is, again, as we mentioned in the
testimony, with the timing, bringing all that special
assessment into 1 year. We would much prefer, Mr. Chairman, to
see that spread out over a longer period of time, and S. 541
allows the flexibility to the FDIC to make that a reality.
Senator Johnson. Do you think the FDIC coverage is adequate
to apply to banks that engage in more risky activities? Is that
adequate?
Mr. Grant. I believe, Mr. Chairman, that the risk-rated
premium system that they have put together is adequate.
Senator Johnson. Mr. Verdier?
Mr. Verdier. No, we don't think that the premium system as
it exists now is adequate to adjust for risk, and so we are
advocating a broader assessment base to cover the larger banks,
as I indicated in our testimony, and that furthermore, we have
recommended and earlier this week recommended that any bank
that is affiliated with a ``too big to fail'' financial
services company should also pay a special systemic risk fee
into the Deposit Insurance Fund. So those two additions, we
think, would go a long way to leveling that disparity that we
already see.
And you asked earlier about the potential effects on a
community bank and its community and customers of the special
assessment. I gave the one example of the $200,000 that would
not--that would be going out of a community bank. I think you
just have to look at it as a small business owner and say,
well, if a small business, in effect, has a tax increase of
$200,000, what does that mean? Well, maybe they don't hire
people. Maybe they don't open up another branch if the bank is
large enough to be thinking of another branch. Maybe they don't
make as many loans as they were going to make. Maybe the
tellers don't get the same kind of pay increase that they were
hoping for. And maybe local investors don't receive dividends,
and that means that money is again taken out of the local
community.
And so the effects would differ from bank to bank, but I
think they would be substantial when you take it throughout the
country, the $15 billion that would be taken out. It is, in
effect, a tax increase on small towns and communities in your
State and around the country.
Senator Johnson. Mr. Crapo?
Senator Crapo. Thank you very much, Mr. Chairman.
My first question, I am just going to ask generally to the
panel and I really don't need anything more than an expression
of assent or disagreement. I have already heard from most of
you in your testimony and I think I know where you are headed
on this, but in the last panel, I focused on the question of
whether we face a sense of urgency here in terms of the
legislation that has been proposed, both the House and the
Senate legislation, to deal with increasing the borrowing
authority for banks and credit unions and for the funds.
Do you all agree that we face an urgency there in the
context of needing to get as much credit availability to the
private sector as possible?
Mr. West. Yes.
Mr. Verdier. Absolutely.
Mr. Grant. Yes.
Mr. Wright.
[Nodding yes.]
Senator Crapo. Let the record reflect that everyone did
indicate that they agreed with that.
The reason I am pushing this point is here in the Senate,
we are facing a battle, I will call it, over whether we should
move this legislation on its own and move it quickly, or
whether we should add to it some other more controversial
provisions, and I think you know the most controversial of
those provisions that we are debating here in the Senate is
what has become the cram down legislation for bankruptcy and
which the House legislation contains.
As I indicated in my opening statement, I strongly oppose
putting the cram down legislation with this legislation and
with S. 541. I am just interested in, again, if you can, brief
responses, as to whether you would support the cram down
legislation, and if not, would you agree that we should not
make this issue, the issue of increasing the loan limits for
the banks and the credit unions, the battleground where we
fight that issue out.
Mr. Grant?
Mr. Grant. I would agree with your assessment, Senator
Crapo. There are two very important issues, and you have
identified them very clearly. One is allowing the flexibility
to the FDIC that S. 541 provides in order to deal with the
issue of making sure that the fund is whole.
The mortgage cram-down, as it has become called, is an
entirely different issue. We remain opposed to it because it is
going to limit credit. It is going to increase the cost of
credit. And we believe that that is an issue that should be
debated separately from the very important matters covered
under S. 541.
Senator Crapo. Thank you.
Mr. West?
Mr. West. We, as far as CUNA is represented, we would be
better off if we didn't have to include the cram down part of
this in there. There is a tremendous sense of urgency on the
other side of it. I think Mr. Grant has made some very positive
comments in this area and I agree with him.
Senator Crapo. Thank you very much.
Mr. Verdier?
Mr. Verdier. Yes, Senator. We oppose the cram down
provisions and we do share your sense of urgency on the deposit
insurance provisions, all the ones I have mentioned. So we
would very much like the Senate and the entire Congress to move
very quickly on the deposit insurance provisions, and as I say,
we oppose the cram down provisions for the reasons we have been
discussing. So I leave it to the Senators to decide exactly how
to achieve the result that we are hoping for.
Senator Crapo. Thank you.
Mr. Wright?
Mr. Wright. I will make it unanimous. We do not support
having the cram down integrated with the things that you have
before you today. We do not support cram down and we think that
it should be kept separate. Don't muddy the waters. Keep it
separate.
Senator Crapo. All right. Thank you very much.
And back to you, Mr. Verdier. You had indicated the anger
that you were feeling from your members. I noted you mentioned
the ``too big to fail'' issue and then you also noted the ``too
small to save'' issue that seems to be bubbling up out there in
the communities. You made the point that we need a more
equitable distribution of the burden of the assessments and a
broader assessment base.
Could you tell me, is that something that would require
legislative action or could that be done administratively, do
you know?
Mr. Verdier. The FDIC, for its general assessment
authority, does have the flexibility to broaden the assessment
base except in the one instance of the systemic risk authority.
They do need some additional flexibility, as Art Murton
indicated in the earlier panel. They are covering some bank
holding company debt that is exempt from assessments, and so
that needs to be fixed. H.R. 1106 does make that change. But,
of course, any directive from the Congress to the FDIC in terms
of using its existing authority or firming up their resolve in
that regard would be most helpful.
Senator Crapo. Thank you very much.
And I do note, Mr. West, I agree with your comments about
the mark-to-market issue and we are encouraging our regulators
to act with all due speed in terms of helping us put that part
of the solution in place.
The last question I have, I am running out of time here,
but you probably all noticed that when we debated the Omnibus
Appropriations Act of 2009, the big omnibus bill just recently,
there was language in there that gave the Federal Trade
Commission authority to expedite rulemaking over mortgage
loans, and many of us were very concerned that that extended
the regulatory authority of yet another agency, the FTC, into
the arenas of banking and financial institutions that were
federally insured unnecessarily and improperly.
We had a colloquy on the floor at that time among Senator
Dodd, Senator Dorgan, Senator Inouye, and myself in which we
agreed that that was not intended by the language and that we
would reg--or statutorily correct that as quickly as possible
and explained to the FTC that they should not try to assert new
jurisdictional regulatory authority over federally insured
depository institutions.
The question I have to you is, and maybe rather than having
all four of you answer this, if there is one of you who would
like to volunteer and jump out first, I really only have time
to probably take one answer here, but could one of you take
just a moment to explain the consequences of adding yet another
Federal regulator into the system here?
I see two hands on a tie, so we will take Mr. Verdier and
then Mr. Grant.
Mr. Verdier. Thank you. Our community bankers report that
they have plenty of regulators, thank you very much. On a
serious note, the Truth in Lending Act is very carefully
enforced by the banking regulators and the Federal Trade
Commission probably has plenty to do without adding more to do
on that issue.
The colloquy was excellent. We congratulate you on that. I
am sure that the FTC has been reading that and we encourage
them to maybe read it every morning.
Senator Crapo. We will be sure they do.
Mr. Grant?
Mr. Grant. And I can just really echo those remarks again.
Thank you very much for your leadership in bringing together
that issue. I can certainly say that there is more than enough
regulation right now. We recently had the FDIC in our bank, and
we are a very good bank, but they were still there for 7 weeks
in the examination process. And the concern would be with
another regulator, not only the additional regulatory burden,
but also the whole issue of possible confusion, as I understand
this, might also bring in the attorney generals of various
States and things like that. There could be a lot of confusion
in addition to the regulatory burden.
Senator Crapo. Well, thank you all very much.
Mr. Chairman, I went over badly. I apologize.
Senator Johnson. Senator Vitter?
Senator Vitter. Thank you, Mr. Chairman, and thanks to all
of the witnesses.
First, Mr. Chairman, I would just like to publicly
underscore a request I made of our committee Chairman today to
have a hearing as quickly as possible, hopefully next week,
about the AIG bonus issue and related issues. I think this is
absolutely necessary for two reasons. First of all, because of
the understandable outrage Americans are expressing over this
and the issue itself. Second, because the House has already
passed retroactive legislation to address this. And I take a
novel view that I actually think we should know the facts, what
bonuses were exempted, what weren't, what the universe is, who
participated in that decision, when the administration
understood this, particularly before we act on legislation. So
I want to re-urge that request to Chairman Dodd publicly.
I am also preparing an amendment to that House legislation
that would say we are stopping the TARP program, and
administration, you can come back to us with that program or
another program once you get your act together and understand
how we are going to avoid these horrible problems in the
future, and this is just but one example. But as of now, we are
stopping the TARP program.
On this issue, thank you again for your testimony. I have a
big general concern that as we work to shore up the insurance
fund, and everybody agrees that we need to make sure it is
sound, that we are going to be really penalizing and hurting
sound, stable community banks and other banks that had
absolutely nothing to do with the mess with subprime mortgages,
with exotic mortgage-backed securities, or anything else. And
so my big concern goes to that.
Specifically, as we all work together to shore up the fund
for the insurance program, and we have no disagreement about
that, shouldn't we change how assessments are made so that it
more appropriately reflects the enormous risk the bigger banks
have brought to the system, which in my opinion is not
adequately reflected now in the rating of risk in terms of how
that goes into FDIC insurance assessments. I would love
anybody's opinion about that.
Mr. Verdier. Senator, I totally agree with you. The point
we would like to make is that there should be a broadening of
the assessment base so that the banks that fund themselves with
unassessed liabilities will begin to pay assessments on those,
and also that any bank that is affiliated with a systemic risk
institution should pay an additional systemic risk fee, and in
testimony that will come before this committee next week, we
will also talk about a possible Systemic Risk Fund that would
be funded by those institutions so that those kinds of costs
that are now being paid by the TARP program could be somewhat,
at least, pre-funded by the systemic risk segment of the
financial services industry.
So I think there is--it is interesting that the FDIC is the
only pre-funded part of this whole effort. Everything else has
been funded by the taxpayers. And so I think we really need to
take a close look and say, who is imposing the costs and who is
paying the bills?
Senator Vitter. All right. Does anyone else have opinions
about that or input?
OK. Well, I hope we take a hard look at that, because I
think it is necessary. Basically, the institutions that created
the problem are, of course, getting enormous bailout relief,
and meanwhile, the smaller institutions that had nothing to do
with the problem are getting an enormous bill because of the
problem that the bigger institutions created. And in some
cases, it is threatening their profitability and their ability
to continue to be out in the real world making loans, and that
is just crazy.
So I think, moving forward, we need to look at changing the
way FDIC insurance premiums are calculated, because there are
huge differences between a community bank whose whole universe
is deposits and a Citigroup or other institutions which have
big investment banking arms that are funded in fundamentally
different ways, and as a result bring enormous risk to their
deposits and to all deposits that community banks don't. And so
I would hope the whole committee can look at that issue.
I support Senator Crapo's proposal with others in terms of
expanding lending authority. I just don't think that should be
the end of the conversation.
Thank you, Mr. Chairman.
Senator Johnson. I would like to thank our second panel of
witnesses for taking the time to testify today on this
important issue.
You are excused, and with that, this hearing is adjourned.
[Whereupon, at 3:31 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
March 19, 2009
As we all know, the economic landscape has undergone significant
change since the Committee last looked at deposit insurance issues. In
these times of economic instability, it is increasingly important that
we have a strong and stable deposit insurance fund and that our
regulators have the tools they need to wind down failed institutions
while at the same time guaranteeing that Americans' savings and
retirement remain safe. I am pleased to hold this hearing today to take
a closer look at deposit insurance issues that the FDIC, National
Credit Union Administration, and our nation's banks and credit unions
currently face. I would also like to welcome our panel of witnesses,
and thank them for their time and for their thoughtful testimony.
As our nation's housing crisis has spread through the economy--
impacting banks, credit unions, secondary markets and millions of
Americans, neither the FDIC's deposit insurance fund nor NCUA's share
insurance fund have failed to make good on its promise to pay for the
insured deposits when a institution fails. This protection is the
bedrock of our financial system, but it has not come for free--the
FDIC's Deposit Insurance Fund ratio has fallen to .4 percent,
substantially lower than the 1.15 percent required ratio, and the
NCUA's share insurance fund has struggled as corporate credit unions
face losses on securities tied to home mortgages. These extraordinary
times have warranted emergency and temporary actions to ensure
continued stability and protection.
There are currently two pieces of legislation pending before the
Banking Committee that seek to address continued deposit insurance
concerns. Senator Dodd has introduced the Depositor Protection Act,
legislation to permanently increase the FDIC's borrowing authority to
$100 billion, and temporarily increase the emergency borrowing
authority to $500 billion until the end of 2010. In addition, the House
of Representatives has passed H.R. 1106, the Helping Families Save
Their Homes Act of 2009. This bill has been referred to the Senate
Banking Committee, and I look forward to hearing more from today's
witnesses about the potential benefits and disadvantages of each of
these pieces of legislation.
While we work to maintain stable insurance funds for our nation's
financial institutions, there is no doubt in my mind that further
action will be needed. I am sensitive to concerns that without
increased borrowing authority, assessments could force financial
institutions to raise consumer fees and curtail lending. This is the
last thing we want as consumers across our nation struggle and frozen
credit markets limit lending to consumers. I am also concerned that too
high assessments could disproportionately affect small banks. I also
believe that any money borrowed from the Treasury must be repaid, with
interest, and that all actions must be temporary with an eye to the
long term restoration of the insurance funds. In addition, this
Committee must consider what is the appropriate level of deposit
insurance coverage and whether the emergency increases should be
extended or even made permanent.
All that said, deposit insurance is a benefit to depository
institutions, and institutions should not look to taxpayers to pay for
deposit insurance. When the financial system recovers, Congress must do
all it can to make sure that banks and credit unions do not resist
efforts to build back up the deposit insurance fund (DIF) and the share
insurance fund.
I will now turn to Senator Crapo, the new ranking member of this
Subcommittee, for his opening statement. Senator Crapo, I have valued
our ability to work together on a number of issues in the past, and I
look forward to working with you on this Subcommittee.
______
PREPARED STATEMENT OF ARTHUR J. MURTON
Director, Division of Insurance and Research,
Federal Deposit Insurance Corporation
March 19, 2009
Chairman Johnson, Ranking Member Crapo and members of the
Subcommittee, I appreciate the opportunity to testify on behalf of the
Federal Deposit Insurance Corporation (FDIC) on current issues in
deposit insurance.
Since the creation of the FDIC during the Great Depression, deposit
insurance has played a crucial role in maintaining the stability of the
banking system. By protecting deposits, the FDIC ensures the security
of the most important source of funding available to insured depository
institutions--funds that can be lent to businesses and consumers to
support and promote economic activity.
Under the current severe economic conditions, the FDIC's deposit
insurance guarantee has proven to be more valuable than ever. While
many sources of bank funding have disappeared during the past 6 months,
deposits have not. They remain a stable source of funding because
depositors know that insured deposits are absolutely safe. No one has
ever lost a penny on an insured deposit.
My testimony will discuss the current condition of the Deposit
Insurance Fund (DIF) and the reasons for the recent decision by the
FDIC Board of Directors (Board) to increase deposit insurance premiums
and impose a special assessment on insured institutions. In addition, I
will discuss the need for an increase in the FDIC's borrowing authority
with the Treasury Department, which has not been permanently increased
in almost 20 years. I will also comment on legislative proposals to
make permanent the temporary increase in the deposit insurance
coverage, to extend the time period for restoring the DIF to the
statutorily mandated range for the reserve ratio and to improve the
systemic risk provisions of the Federal Deposit Insurance Act. Finally,
I will discuss whether we should reexamine the mandatory rebate
provisions that were enacted as part of the Deposit Insurance Reform
Act in 2006.
Condition of the Deposit Insurance Fund
During 2008, 25 FDIC-insured institutions with assets of $372
billion failed, the largest number of failures since 1993 when 41
institutions with combined assets of $3.8 billion failed (excluding
thrifts resolved by the RTC). So far this year, 17 FDIC-insured
institutions with combined assets of $7.7 billion have failed. In
addition, two banking organizations have received assistance under a
systemic risk determination over the past 6 months. As part of its
restoration plan and recent final rulemaking on assessments, the FDIC
is estimating a range of possible failure cost estimates over the 2009-
2013 period, with $65 billion considered the most likely outcome.
In 2008, the DIF balance fell by more than $33.5 billion (64
percent), primarily because of over $40 billion in loss provisions.\1\
The industry funded Deposit Insurance Fund (DIF) decreased by almost
$16 billion during the fourth quarter to $19 billion. This fund balance
is net of loss reserves totaling $22 billion set aside for failures
anticipated in 2009, which are subject to adjustments based on changing
economic and financial conditions.
---------------------------------------------------------------------------
\1\ The figure includes $18 billion in losses not previously
reserved for failures in 2008 and $22 billion in estimated losses for
anticipated failures in 2009.
---------------------------------------------------------------------------
The DIF's reserve ratio equaled 0.40 percent on December 31, 2008,
which was 36 basis points lower than the previous quarter. During 2008,
the reserve ratio decreased by 82 basis points, from 1.22 percent at
year-end 2007. The December figure is the lowest reserve ratio for a
combined bank and thrift insurance fund since June 30, 1993, when the
reserve ratio was 0.28 percent.
Recently, the FDIC's Board of Directors made a series of very
difficult decisions to ensure that our nation's deposit insurance
system maintains the integrity of its industry funded assessment base.
First, they extended the period in which the DIF reserve ratio must
return to 1.15 percent from five to 7 years, due to the extraordinary
circumstances facing the banking industry. Second, they set an
assessment rate schedule under which most insured institutions would
pay between 12 and 16 basis points before certain adjustments,
effective the second quarter of 2009. These rates are in line with the
rates we had signaled would be necessary last October to bring the
reserve ratio back up to the statutorily mandated minimum of 1.15
percent over the restoration plan horizon. Finally, and most
importantly, the Board adopted an interim rule setting a special
assessment of 20 basis points for June 30, to be collected September
30. We welcome comments on the interim rule that will be considered in
any final rulemaking.
The FDIC realizes that these assessments are a significant expense,
particularly during a financial crisis and recession when bank earnings
are under pressure. Banks face tremendous challenges right now even
without having to pay higher assessments. We also recognize that
assessments reduce the funds that banks can lend in their communities
to help revitalize the economy. However, the reality is that these
increases in assessments are necessary to ensure the adequacy of the
FDIC's industry funded resources to resolve projected bank failures.
The FDIC's guarantee has always been funded by the industry. All banks
benefit from the FDIC's industry funded status and deposit insurance
has been one key component of addressing our current financial crisis
that has not relied on taxpayer funding.
Some have suggested that the assessment burden should fall more
squarely on weaker, higher risk banks. In point of fact, the new risk-
based rules the FDIC finalized on February 27, 2009 assure that the
regular assessment system will charge higher risk banks significantly
more. But there is only so much burden that we can place on weaker
banks without forcing them into insolvency, a self-defeating exercise
which would end up costing the insurance fund even more. This is why a
flat-rate special assessment was deemed the wiser course. Moreover, any
system of insurance requires to some degree that premiums paid by well-
managed and healthier institutions cover the losses caused by their
weaker counterparts.
It also has been suggested that the assessment should target larger
banks. The Board is seeking public comment on whether the base for the
special assessment should be total assets or some other measure that
would impose a greater share of the aggregate special assessment on
larger institutions than the regular assessment base (domestic
deposits). We are also seeking comment on whether the special
assessments should take into account the assistance provided to
systemically important institutions.
Borrowing Authority
The FDIC strongly supports S. 541, the Depositor Protection Act of
2009, legislation to increase the FDIC's borrowing authority with the
Treasury Department if losses from failed financial institutions exceed
the industry funded resources of the DIF.
The FDIC's borrowing authority was statutorily set in 1991 at $30
billion and has not been raised since that date. Assets in the banking
industry have tripled since 1991, from $4.5 trillion to almost $14
trillion, and the FDIC believes it is prudent to adjust the statutory
line of credit proportionately to leave no doubt that the FDIC can
immediately access the necessary resources to resolve failing banks and
provide timely protection to insured depositors. Deposits insured by
the FDIC are backed by the full faith and credit of the United States
and the FDIC's borrowing authority ensures that this obligation to
protect depositors is met seamlessly and without interruption.
S. 541 would permanently increase the FDIC's authority to borrow
from Treasury from $30 billion to $100 billion. In addition, the bill
also would authorize a temporary increase in that borrowing authority
above $100 billion (but not to exceed $500 billion) to address exigent
circumstances, based on a process that would require the concurrence of
the FDIC, the Federal Reserve Board and the Treasury Department, in
consultation with the President. Any use of the borrowing authority is
required by statute to be repaid by assessments on insured
institutions. This temporary emergency authority is being requested as
part of contingency planning. From a public confidence standpoint, we
believe it is important to demonstrate the FDIC's ability to
immediately access significant liquidity in even high stress scenarios.
We want to make sure the funding mechanics are in place to meet all
contingencies.
The FDIC Board's decision regarding the size of the recently
announced special assessment reflected the FDIC's responsibility to
maintain adequate resources to cover unforeseen losses. Chairman Bair
has stated that increased borrowing authority would give the FDIC
flexibility to reduce the size of the recent special assessment, while
still maintaining assessments at a level that supports the DIF with
industry funding based on current loss projections. While the industry
would still pay assessments to the DIF to cover projected losses and
rebuild the Fund over time, a lower special assessment would mitigate
the impact on banks at a time when their communities need them more
than ever and they are called upon to revitalize the economy.
The events of the past year have demonstrated the importance of
contingency planning to cover unexpected developments in the financial
services industry. Indeed, in temporarily increasing deposit insurance
coverage from $100,000 to $250,000, Congress also temporarily lifted
all limits on the FDIC's borrowing as necessary to carry out the
increase in the maximum deposit insurance amount. The Depositor
Protection Act would leave no doubt that the FDIC will continue to have
the resources necessary to address future contingencies and seamlessly
fulfill the government's commitment to protect insured depositors
against loss. The FDIC strongly supports this legislation and looks
forward to working with the sponsors to enact it into law.
Improving the Systemic Risk Special Assessment
Section 13(c)(4)(G) to the Federal Deposit Insurance Act (FDI Act)
authorizes action by the Federal Government in circumstances involving
systemic risk to the banking industry. It permits the FDIC to take
action or provide assistance as necessary to avoid or mitigate the
effects of the perceived risks, following a recommendation of the
existence of systemic risk by the FDIC's Board, with the written
concurrence of the Board of Governors of the Federal Reserve System
(FRB) and an eventual determination of systemic risk by the Secretary
of the Treasury (after consultation with the President).
The FDI Act also requires the FDIC to recover any loss to the DIF
arising from any action taken or assistance provided pursuant to a
systemic risk determination. Under current law, the FDIC must recover
any loss expeditiously from one or more emergency special assessments
on the insured depository institutions based on the amount of each
insured depository institution's average total assets minus the sum of
the institution's average total tangible equity and its average total
subordinated debt.
The Federal Government exercised the systemic risk authority for
the first time in September 2008, and on three more occasions since
then. In each of these cases, the FDIC took sound actions, such as
charging fees, to offset its new risk exposure and minimize the
likelihood that there will be a loss requiring a systemic risk special
assessment. However, the FDIC's recent experience suggests that the
current statutory provisions regarding a systemic risk special
assessment may not provide sufficient flexibility to appropriately
allocate any special assessment among the parties who benefit from
government action to address challenges that pose a risk to the
financial system.
For example, the recent actions taken under the systemic risk
authority have directly and indirectly benefited holding companies and
non-bank affiliates of depository institutions, including shareholders
and subordinated creditors of these organizations. Among the
beneficiaries are large holding companies owning depository
institutions that make up only a very small part of the consolidated
organization. Such actions were necessary to stabilize financial
markets and provide increased liquidity in the financial system. Yet,
while holding companies and their non-bank affiliates, shareholders,
and subordinated creditors stand to benefit from the government's
actions, they would bear a cost under the current systemic risk
assessment that is disproportionately small compared to the benefits.
Instead, the assessment would disproportionately burden many
traditional banking companies, particularly those with few or no non-
bank affiliations.
The statutory language in H.R. 1106 would allow the FDIC to impose
systemic risk special assessments, by rulemaking subject to the notice-
and-comment procedures of the Administrative Procedure Act, on insured
depository institutions or depository institution holding companies, or
both. When exercising the authority to assess holding companies, the
FDIC would consult with the Secretary of the Treasury and the Board of
Governors of the Federal Reserve System. This authority would not be
used to pre-fund assessments to pay for losses that the FDIC
contemplates may be incurred as a result of invoking the systemic risk
authority; rather, it would be used to recover losses actually
incurred.
This approach would be more consistent with the statutory
provisions governing the FDIC's other assessment authority, which set
broad direction for the FDIC to implement through notice-and-comment
rulemaking, and with the provisions governing systemic risk
determinations. In prescribing systemic risk special assessment
regulations, the FDIC would be required to consider certain factors,
including economic conditions; the effects on the industry; and such
other factors as the Corporation deems appropriate. In addition, the
proposed amendment would enable the FDIC to establish the appropriate
timing for recovering any loss in its assessment rulemaking in a manner
that is not pro-cyclical and does not exacerbate problems in the
financial industry. Depository institution holding companies also would
be subject to the statutory requirements to pay assessments and
penalties for late payment or nonpayment.
In addition to the provisions in H.R. 1106 to broaden the base for
a systemic risk special assessment, the FDIC would recommend a
statutory change to provide a priority for the government over general
creditors in cases where the bank defaults on debt that has been
guaranteed by the FDIC and is placed in receivership. In October 2008,
the FDIC Board of Directors approved the Temporary Liquidity Guaranty
Program (TLGP) to free up funding for banks. Indications to date
suggest the program has improved access to funding and lowered banks'
borrowing costs.
The purpose of this statutory change would be to put the FDIC and
senior unsecured debt holders that are guaranteed by the TLGP
immediately after depositors to recover from the assets of the estate
of a failed insured depository institution. Debt guaranteed by the FDIC
serves an important public policy purpose and should receive a priority
in a bank receivership over general creditors. Without this amendment,
the debt holders of insured depository institutions and the FDIC as
subrogee of their rights will share pro rata with general creditors of
the estate. This provision will increase the likely recovery to the
FDIC for the costs of any guarantee of insured institution debt that it
might be required to honor and could reduce the need for or amount of a
systemic risk special assessment.
Permanently increasing coverage to $250,000
With regard to proposals to make permanent the current temporary
increase in deposit insurance coverage to $250,000, the FDIC believes
that the level of deposit insurance coverage is a policy determination
that appropriately should be made by Congress. However, because any
increase in the level of deposit insurance coverage increases exposure
to the DIF, such a change must also permit the FDIC to account for the
newly insured deposits when setting premiums necessary to maintain the
DIF.
Permanently increasing the level of insurance coverage also will
have the effect of immediately reducing the reserve ratio of the DIF.
Since the DIF reserve ratio is currently below the statutorily mandated
range for the reserve ratio, the FDIC is operating under a restoration
plan to return the reserve ratio of the DIF to at least 1.15 percent of
estimated insured deposits. The FDIC Board recently extended the length
of that plan from five to 7 years due to the extraordinary
circumstances facing the banking industry and instituted a combination
of premium increases and special assessments necessary to implement the
restoration plan. Because of the immediate dilutive effect on the DIF
of permanently increasing coverage to $250,000, extending the statutory
5-year time period for restoring the DIF reserve ratio to at least the
bottom end of the statutorily mandated range would be appropriate.
Mandatory Rebates
One of the most important goals of the reforms included in the
Federal Deposit Insurance Reform Act was to make the deposit insurance
assessment system less pro-cyclical. To achieve this result, in 2006,
the FDIC was provided with greater flexibility to assess institutions
based on risk and to buildup the DIF in good times. However, the
legislation included restrictions on the growth of the DIF that may
still contribute to higher assessments against financial institutions
during times of economic stress.
Under current law, the FDIC is required to rebate half the
assessment revenue it collects when the DIF reserve ratio is above 1.35
percent. In addition, the FDIC is required to rebate all amounts in the
DIF that keep the reserve ratio above 1.5 percent. The result of these
mandatory rebates is to limit the ability of the DIF to grow in good
times and to effectively cap the size of the DIF.
These restrictions on the size of the DIF will limit the ability
of the FDIC to rebuild the Fund in the future to levels that can offset
the pro-cyclical impact of assessment increases during times of
economic stress. Limits on the size of the DIF of this nature will
inevitably mean that the FDIC will have to charge higher premiums
against the industry when conditions in the economy are causing
significant numbers of bank failures. As part of the consideration of
broader regulatory restructuring, Congress may want to consider the
impact of the mandatory rebate requirement or the possibility of
providing for greater flexibility to permit the DIF to grow to levels
in good times that will establish a sufficient cushion against losses
in the event of an economic downturn.
Conclusion
The events of recent months have clearly demonstrated the benefits
of deposit insurance to depositors and banks. During this difficult
period, insured deposits have been fully protected in every bank
failure. Assured by this guarantee, consumers have continued to
maintain deposits in insured financial institutions that have provided
vital liquidity for communities across the country. With additional
modifications to the deposit insurance system, such as the increase in
the FDIC's borrowing authority, we can maintain a system that continues
the FDIC's mission of providing stability to the financial system.
______
PREPARED STATEMENT OF DAVID M. MARQUIS
Executive Director, National Credit Union Administration
March 19, 2009
I. INTRODUCTION
The National Credit Union Administration (NCUA) appreciates this
opportunity to provide the agency's position on ``Current Issues in
Deposit Insurance.'' Federally insured credit unions comprise a small
but important part of the financial institution community, and the
NCUA's perspective on this matter will add to the overall understanding
of the needs of the credit union industry and the members they
serve.\1\ Financial institutions play a critical role in the economy,
and it is vital they remain safe and sound. The protection and security
provided by Federal deposit insurance to depositors is a key foundation
of the confidence in and stability of America's financial institutions.
Therefore, it is important and timely to consider methods to improve
the framework for deposit insurance coverage and the operational
authorities available to the Federal deposit insurers.
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\1\ 12 U.S.C. Sec. 1759. Unlike other financial institutions,
credit unions may only serve individuals within a restricted field of
membership. Other financial institutions serve customers that generally
have no membership interest.
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The NCUA's primary mission is to ensure the safety and soundness of
federally insured credit unions. It performs this important public
function by examining all Federal credit unions, participating in the
examination and supervision of federally insured State-chartered credit
unions in coordination with State regulators, and insuring federally
insured credit union members' accounts. In its statutory role as the
administrator of the National Credit Union Share Insurance Fund
(NCUSIF), the NCUA insures and supervises 7,806 federally insured
credit unions, representing 98 percent of all credit unions and
approximately 88 million members.\2\
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\2\ Approximately 162 State-chartered credit unions are privately
insured. Based on December 31, 2008 Call Report (NCUA Form 5300) data.
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Overall, federally insured, natural person credit unions maintained
satisfactory financial performance in 2008. As of December 31, 2008,
federally insured credit unions maintained a strong level of capital
with an aggregate net worth ratio of 10.92 percent.\3\ While earnings
decreased from prior levels due to the economic downturn, federally
insured credit unions were able to post a 0.30 percent return on
average assets in 2008.\4\ Delinquency was reported at 1.37 percent,
while the net charge-off ratio was 0.84 percent.\5\ Shares in federally
insured credit unions grew 7.71 percent with membership growing 2.01
percent, and loans growing 7.08 percent.\6\
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\3\ Based on December 31, 2008 Call Report (NCUA Form 5300) data.
\4\ Ibid.
\5\ Ibid.
\6\ Ibid.
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The NCUA's comments will focus in particular on the following
areas:
Provisions of H.R. 1106 to permanently increase deposit
insurance coverage to $250,000, increasing the NCUA's borrowing
authority to $6 billion, and extending the share insurance
fund's restoration period to 5 years. The NCUA supports these
proposals.
Emergency borrowing authority for the NCUA. NCUA should be
provided up to $30 billion in emergency borrowing authority
under the same conditions applicable to the proposed emergency
borrowing authority for the Federal Deposit Insurance
Corporation (FDIC) in S. 541.
Systemic risk authority for the NCUA. Providing the NCUA
with authority, similar to FDIC, to address systemic risk under
extreme circumstances when the authority provided by Section
208 of the Federal Credit Union Act is insufficient.
II. DEPOSIT INSURANCE COVERAGE--PERMANENT INCREASE TO $250,000
The NCUA agrees with the provision in Section 204(a) of H.R. 1106
to make the temporary increase to $250,000 of the standard maximum
share insurance amount (SMSIA) permanent.\7\ Reverting the general
limit for share insurance coverage to $100,000 at the end of 2009 would
likely be a destabilizing event, affecting public confidence and
creating burdens for institutions and consumers. Conversely, continuing
the expanded coverage will allow federally insured credit unions at all
asset levels to better meet contemporary member needs.
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\7\ The term ``standard maximum share insurance amount'' or
``SMSIA'' means $100,000, adjusted pursuant to subparagraph (F) of
section 11(a)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1821(a)(1)(F)), notwithstanding the temporary increase to $250,000
authorized by the Emergency Economic Stabilization Act.
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The temporary increase in the SMSIA to $250,000 helped preserve
public confidence in federally insured credit unions. Despite the
widely publicized challenges of the current economic environment,
during 2008 the average share balance \8\ in federally insured credit
unions increased by 5.59 percent. All share categories posted
respectable gains. Since shares were increasing at a projected annual
rate of 7.69 percent through September 30, 2008, the temporary increase
in the SMSIA helped prevent a deterioration of liquidity during the
fourth quarter. While it is impossible to isolate this trend from other
factors, such as uncertainties in equity markets, NCUA attributes the
stability of insured shares during the fourth quarter of 2008 to public
confidence in federally insured credit unions.
---------------------------------------------------------------------------
\8\ Reflecting their status as member-owned cooperatives, deposit
accounts in federally insured credit unions are called shares not
deposits.
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If the SMSIA limit of $250,000 remains temporary, the NCUA
envisions federally insured credit unions experiencing operational
challenges. During the fourth quarter of 2008, federally insured credit
unions bolstered efforts to educate their members about the value of
Federal insurance. Members, in turn, continued to support their
federally insured credit unions and helped stem a national liquidity
crisis. NCUA also initiated an intensive national advertising campaign
and public awareness efforts to reinforce the safety of federally
insured credit unions. Inconsistency in the SMSIA would undermine this
progress. In addition, federally insured credit unions would face
increased balance sheet management challenges if large depositors
display a reluctance to invest in or renew certificate accounts with
maturities extending beyond 2009.\9\
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\9\ As of December 31, 2008, shares with maturities exceeding
twelve months exceeded eleven percent of all shares.
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Historically, increases in the SMSIA coverage level have not been
methodical. When created in 1970, the NCUSIF provided $20,000 in
maximum coverage. Subsequently, the ceiling increased to $40,000 during
1974 and $100,000 during 1980. Although the maximum available coverage
for Individual Retirement Accounts (IRAs) increased to $250,000 during
2006, the SMSIA remained at $100,000 for all other types of share
accounts. Section 2103(a) of the Federal Deposit Insurance Reform Act
of 2005 allowed for the adjustment of the SMSIA every 5 years beginning
April 1, 2010 based on the Personal Consumption Expenditures Chain-type
Price Index (PCEPI). However, there is no legal guarantee an increase
in the SMSIA will occur.
Making the $250,000 SMSIA permanent would create parity, when
adjusting for inflation, with the SMSIA limits of the 1980s. From 1980
to 2008, the PCEPI increased from 49.688 to 120.606.\10\ Using the
PCEPI as a basis, adjusted for inflation the $100,000 SMSIA in 1980
would equate to approximately $243,000 in 2008 dollars. \11\
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\10\ The base year for this data is 2000, with an index value of
100. The source of this data is the archived Federal Reserve Economic
data available at the Internet site http://alfred.stlouisfed.org/
series?seid=PCEPI.
\11\ The computation is as follows: 1) convert the 1980 SMSIA limit
of $100,000 to 2000 base year dollars [$100,000 / .49688 =
$201,255.84]; and 2) convert the base year equivalent of the 1980 level
of coverage to 2008 dollars using the 120.606 index value for 2008
[$201,255.84 1.20606 = $242,726.61].
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Historically, some have expressed concern that increased coverage
limits of federally insured deposits creates additional moral hazard.
NCUA believes improvements in the regulation of financial institutions
offset this concern. In addition, NCUA remains prepared to contribute
toward reducing insurance losses over the long term as a participant in
the current review of the Federal regulatory structure. Other
traditional arguments against higher coverage limits also now have
diminished relevance. In the past, many perceived higher federally
insured limits as a detriment to smaller institutions based on the
belief consumers with greater resources could consolidate their
business with larger financial institutions. NCUA is not aware of any
evidence indicating the higher SMSIA has adversely affected smaller
federally insured credit unions since the fourth quarter of 2008.\12\
Federally insured credit unions at all asset levels continue to respond
proactively to the needs of their respective fields of membership. As
the table below indicates, the NCUA's 2008 yearend statistics reflect
how all asset classes of federally insured credit unions reported share
increases.
---------------------------------------------------------------------------
\12\ Consumers have continued a broader diversification of assets
beyond exclusively using federally insured financial institutions. The
Board of Governors of the Federal Reserve's 2007 Survey of Consumer
Finances (http://www.federalreserve.gov/pubs/bulletin/2009/pdf/
scf09.pdf) indicates just 15.1 percent of the financial assets of
families was in transaction accounts or certificates of deposits (not
including retirement accounts).
----------------------------------------------------------------------------------------------------------------
$100
Under $10 $10 million million to Over $500
Asset Group million to $100 $500 million
million million
----------------------------------------------------------------------------------------------------------------
# of Federally Insured Credit Unions........................ 3,274 3,249 954 329
Share Growth................................................ 4.68% 6.61% 8.12% 8.32%
----------------------------------------------------------------------------------------------------------------
If the SMSIA limit of $250,000 remains temporary, members with
funds in excess of $100,000 would need to use multiple insured
institutions to be fully insured. A lower SMSIA could have the effect
of causing members with higher levels of funds to conduct business with
an institution they would otherwise prefer not to use. Efforts to
impose a limit to consumer choices would not eliminate the ultimate
need for any federally insured institution to respond to consumer
needs. In addition, higher limits could also enhance the
competitiveness of smaller institutions over a longer period of time
with a greater ability to attract larger deposits.\13\
---------------------------------------------------------------------------
\13\ This is especially true for federally insured credit unions
serving predominantly low-income members relying upon nonmember
deposits to compensate for an inability to develop a competitive
deposit base organically.
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Another common objection to higher Federal deposit insurance limits
relates to concern about favoring relatively affluent segments of
society. As the agency charged with overseeing a movement with the
specified mission of meeting the credit and savings needs of consumers,
especially persons of modest means, the NCUA recognizes the value
members with the ability to make large deposits have in providing
affordable borrowing opportunities for all classes of members. While
the overwhelming majority of federally insured credit union members
have deposits well below the current SMSIA, an additional option for
members with high levels of assets would only help in continuing a
successful model.\14\ The NCUA also notes federally insured credit
unions would benefit from a higher SMSIA limit because of a lack of
access to other avenues of building deposits available to other types
of institutions such as unlimited coverage for business accounts and
certificate of deposit registry services.
---------------------------------------------------------------------------
\14\ The agency notes that without maintaining the $250,000 limit
in the SMSIA, only individuals able to open IRAs would have access to
higher levels of coverage.
---------------------------------------------------------------------------
The NCUA does not anticipate encountering significant operational
issues if the higher SMSIA became permanent. The agency has the
infrastructure in place to effectively communicate with both federally
insured credit unions and members to announce any changes in the
insured limits. In addition, the NCUA Board left the regulations
discussing share insurance coverage and signage requirements flexible
to accommodate additional potential changes to the SMSIA.
As in the past, if the higher SMSIA limit became permanent, the
agency would complement formal communications with other resources,
such as the NCUA's Internet site and periodic educational initiatives
such as webinars. Although these types of initiatives would have some
initial costs, ultimately the federally insured credit union system
would experience a savings through the benefits derived from greater
long-term liquidity in the system.
If the SMSIA of $250,000 became permanent, federally insured credit
unions would incur negligible costs to bring the NCUSIF's equity ratio
to its targeted level of 1.30 percent. With a SMSIA of $250,000, NCUA
estimates insured shares would increase by $49 billion for the entire
federally insured credit union system, reducing the equity level of the
NCUSIF by only 2 basis points. Since federally insured credit unions
maintain a NCUSIF capitalization deposit of 1 percent of insured
shares, an increase to the SMSIA would equate to aggregate additional
NCUSIF capitalization needs of approximately $490 million. This total
represents less than one tenth of 1 percent of the total assets in
federally insured credit unions.
III. EXTEND NCUSIF REPLENISHMENT AUTHORITY TO 5 YEARS
In the event the NCUSIF equity ratio falls below 1.20 percent, NCUA
is required to assess a premium (and if necessary recapitalize the 1
percent deposit) to restore the equity of the NCUSIF to 1.20 percent.
NCUA believes that extending the time the agency has to reach the
statutory minimum equity ratio provides an important anti-cyclical
tool. This would allow, to some extent, the equity level to vary with
the economic cycle and reduce the impact of recapitalization at the
trough of the business cycle. Not only does the current structure
necessitate premium assessments against federally insured credit unions
when they can least afford it, but it also reduces the amount of funds
federally insured credit unions can put to work supporting the economy
when the need is the greatest. In particular, every dollar charged in
premiums translates to ten dollars not available to be loaned to credit
union members.
IV. INCREASED BORROWING AUTHORITY FOR THE NCUSIF
The NCUA strongly supports the provision in Section 204(c) of H.R.
1106 increasing the NCUA's borrowing authority. Borrowing authority is
vital for a deposit insurer as the insurance fund's short-term cash
needs typically far exceed expected losses. For example, with the
failure of a large institution NCUA might need to promptly (generally
within 2 days) payout all the insured shares, which for the largest
institutions would exceed immediately available liquidity, even though
the ultimate loss (expense) to be absorbed by the insurance fund after
assets of the institution are liquidated may only be a small amount.
When Congress established the NCUSIF in 1970, it provided the NCUA
Board the authority to borrow from the Treasury in an aggregate amount
not to exceed $100,000,000.\15\ With the passage of time, the size of
the credit union system, the amount of insured shares, and the
corresponding size of the NCUSIF and its obligations have all grown
significantly. As the chart that follows demonstrates, the NCUSIF's
assets and equity, as well as the assets and insured shares held by
federally insured credit unions, were much lower than they are today.
By the end of 1972, borrowing authority was six times NCUSIF assets of
$16.7 million, nearly six and a half times NCUSIF equity of $15.6
million, and 0.7 percent of federally insured credit union assets. The
chart includes figures for year-end 1972 since, after the law
establishing the NCUSIF was enacted in 1970, NCUA extended Federal
insurance to State-chartered credit unions over a 2-year period.\16\
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\15\ ``If, in the judgment of the Board, a loan to the fund is
required at any time for carrying out the purposes of this title, the
Secretary of the Treasury shall make the loan, but loans under this
paragraph shall not exceed in the aggregate $100,000,000 outstanding at
any one time. Except as otherwise provided in this subsection and in
subsection (e) of this section, each loan under this paragraph shall be
made on such terms as may be fixed by agreement between the Board and
the Secretary of the Treasury.'' FCU Act, Sec. 203(d)(1) (12 U.S.C.
Sec. 1783(d)(1)).
\16\ Equivalent borrowing authority today would be much higher if
the initial, small volume of insured credit unions during the fund's
first year of operation were used as the basis for the calculation.
----------------------------------------------------------------------------------------------------------------
(B) Ratio of (D) 2008
Basis for Computing 2008 Borrowing Equivalent Borrowing
Equivalent Borrowing Authority (A) 1972 Figures Authority to (C) 2008 Figures Authority (Column
1972 Figures B C)
----------------------------------------------------------------------------------------------------------------
NCUSIF Assets................... $16,785,000 6.0 $7,845,581,935 $46,741,626,065
NCUSIF Equity................... $15,559,000 6.4 $7,667,860,827 $49,282,478,482
NCUSIF Retained Earnings........ $15,559,000 6.4 $1,690,946,528 $10,867,964,059
Insured Shares.................. $13,699,458,000 0.007 $598,122,224,526 $4,366,028,382
FICU Assets..................... $13,849,997,000 0.007 $801,672,388,418 $5,788,249,546
----------------------------------------------------------------------------------------------------------------
To keep pace with these changes, and to help the NCUSIF position
itself for current and future challenges to the economy and the
financial system, the NCUA recommends the NCUSIF's statutory borrowing
authority be adjusted proportionally to the increase over time in the
total assets of insured credit unions. The NCUA believes the assets of
federally insured credit unions are the best measure of potential risk
exposure for the NCUSIF. This would result in an increase in NCUSIF
borrowing authority to approximately $6 billion.
Finally, the NCUA recommends that Congress provide the NCUSIF with
additional, temporary emergency borrowing authority. The proposal in S.
541 to amend the Federal Deposit Insurance Act (FDIA) to increase
FDIC's borrowing authority from $30 billion to $100 billion also
includes a temporary provision allowing FDIC to borrow up to $500
billion if the Treasury Secretary, in consultation with the President,
approves the higher borrowing authority. Credit unions, like banks, are
facing challenging times. Many of the challenges are systemic, such as
the problems with the asset-backed securities held by many corporate
credit unions. To address such systemic problems, and the potential for
sudden liquidity needs associated with such problems, the NCUSIF may
need quick access to very large, short-term borrowings.
Thus, Congress should add a similar, temporary emergency borrowing
authority for the NCUSIF in an amount not to exceed $30 billion, five
times the proposed base borrowing authority of $6 billion.\17\ The NCUA
would exercise this emergency borrowing authority on terms and
conditions similar to the emergency borrowing authority for the FDIC.
The NCUA's emergency authority would only be exercised with the
concurrence of the Secretary of the Treasury, after consultation with
the President. This emergency authority would be temporary, expiring on
December 31, 2010. Any use of this special authority by the NCUA would
require the agency to submit a report to the House Financial Services
and Senate Banking Committees.
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\17\ The amendments to the FCU Act incorporating both the increase
in the base limit to $6 billion and the new emergency limit of $30
billion might look like this: Section 203(d) of the Federal Credit
Union Act (12 U.S.C. 1783(d)) is amended--
(1) in paragraph (1), by striking `$100,000,000' and inserting
`$6,000,000,000'; and
(2) by adding at the end the following:
`(4) TEMPORARY INCREASES AUTHORIZED--
(A) RECOMMENDATIONS FOR INCREASE--During the period beginning on
the date of enactment of this paragraph and ending on December 31,
2010, if, upon the written (continued)
recommendation of the Board (upon a vote of not less than two-thirds of
the members of the Board) and the Board of Governors of the Federal
Reserve System (upon a vote of not less than two-thirds of the members
of such Board), the Secretary of the Treasury (in consultation with the
President) determines that additional amounts above the $6,000,000,000
amount specified in paragraph (1) are necessary, such amount shall be
increased to the amount so determined to be necessary, not to exceed
$30,000,000,000.
`(B) REPORT REQUIRED--If the borrowing authority of the Board is
increased above $6,000,000,000 pursuant to subparagraph (A), the Board
shall promptly submit a report to the Committee on Banking, Housing,
and Urban Affairs of the Senate and the Committee on Financial Services
of the House of Representatives describing the reasons and need for the
additional borrowing authority and its intended uses.'.
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The NCUA would like to emphasize that this requested borrowing
authority, while large in dollar terms, does not represent any
potential burden on the taxpayer. If the NCUA was forced to borrow from
the Treasury, the funds would be repaid with interest either through
the sale of assets or by assessments on all federally insured credit
unions.
V. SYSTEMIC RISK AUTHORITY FOR THE NCUA
The NCUA charters, regulates, and provides share (deposit)
insurance to credit unions. In its role as share insurer for credit
unions, it functions very much like the FDIC as insurer of banks. The
FDIA, however, provides the FDIC with a particular statutory authority
related to its deposit insurance called the ``systemic risk'' authority
(FDIA Sec. 13(c)(4)(G), 12 U.S.C. Sec. 1823(c)(4)(G)) that the NCUA
does not have. Congress should consider amending the Federal Credit
Union Act (FCUA) to provide the NCUA with a systemic risk authority
similar to that available to the FDIC.
Section 13(c) of the FDIA empowers the FDIC to provide certain
assistance to insured banks that are in danger of closing on a
voluntary basis, subject to certain statutory limitations, such as that
the assistance be at the least cost to the Deposit Insurance Fund (DIF)
and that the actions not protect depositors for more than the insured
portion of their deposits. In an appropriate situation, the FDIC may
exercise its systemic risk authority to provide assistance not
otherwise authorized by Sec. 13(c). This systemic risk authority
requires a determination by the Secretary of the Treasury that
compliance with Sec. 13(c) statutory limitations would have serious
adverse economic effects on economic conditions or financial stability,
and, with the concurrence of two-thirds of the members of the Board of
Governors of the Federal Reserve and two-thirds of the FDIC directors,
the FDIC may then take actions to assist insured banks without regard
to the various limitations enumerated in Sec. 13(c).
The FDIC used its systemic risk authority last fall. As the current
financial crisis was unfolding, the FDIC launched its Temporary
Liquidity Guarantee (TLG) Program as an initiative to counter the
current system-wide crisis in the nation's financial sector. The TLG
Program provided two guarantee programs: One that guaranteed newly
issued senior unsecured debt of insured banks and most U.S. holding
companies of such insured banks, and another that guaranteed certain
noninterest-bearing transaction accounts at insured banks. The FDIC
announced that the TLG Program was necessary to promote financial
stability by preserving confidence in the banking system and
encouraging liquidity in order to ease lending to creditworthy
businesses and consumers. Because the two guarantee programs were
beyond the general assistance authority contained in FDIA Sec. 13(c),
the FDIC first obtained a determination of systemic risk from the
Secretary of the Treasury (after consultation with the President),
supported by the written recommendations of the FDIC Board and the
Board of Governors of the Federal Reserve System.
The NCUA Board has certain tools available under Sec. 208 of the
FCUA (12 U.S.C. Sec. 208) to address a threat to any given institution
that is in danger of closing.\18\ These tools are similar to those
available to the FDIC under FDIA Sec. 13(c), including making loans to,
purchasing the assets of, or establishing accounts in the institution
in danger of closing. Like the FDIA Sec. 13(c), FCUA Sec. 208 is also a
limited authority. For example, Section 208 assistance can only be
provided to federally insured credit unions that are in danger of
closing; and each of the assistance actions contemplated under Sec. 208
is in the nature of a bilateral agreement, that is, assistance in the
form of asset purchases, loans, and establishment of accounts all
require that there be a voluntary agreement between the NCUA and the
affected institution.
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\18\ Section 208(a)(1) provides for assistance to federally insured
credit unions in danger of closing. Section 208(a)(2) provides for
assistance to credit unions to facilitate a merger or purchase and
assumption. The references to Sec. 208 assistance in this testimony
mean Sec. 208(a)(1) assistance.
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These Sec. 208 constraints limit the NCUA's ability to respond when
circumstances arise that present a threat to the overall viability of
the credit union system. In the current economic climate, such
circumstances are plentiful. Economic recession has produced a
substantial rise in unemployment; deterioration in the residential real
estate market has placed a strain on housing values and mortgage
lenders and a severe tightening of credit; securities markets are
disrupted and the values of asset-backed securities are uncertain; and
all this is leading to significant losses at depository institutions
across the nation. The cumulative effect of these factors can undermine
the confidence of the public in the credit union system as a whole,
creating systemic risk.
In order to quickly and effectively respond to such circumstances,
the NCUA needs authority to take action in response to systemic risk.
There are two recent examples of circumstances in which the NCUA,
confronted with systemic risks, was forced to take less than optimal
actions in dealing with these risks.
1. Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP).
The NCUA Board took action on January 28, 2009 to address concerns
in the corporate credit union system related to declines in the value
of asset backed securities and precipitated by a substantial capital
impairment at a corporate credit union. The NCUA Board, on behalf of
the NCUSIF:
Infused $1 billion in capital into the corporate credit
union;
Temporarily guaranteed the entire amount of all share
(deposit) accounts at each corporate credit union for about a
1-month period; and
Offered to guarantee the share accounts at each corporate
credit union, on a voluntary basis, through December 31, 2010.
In support of the latter two actions, collectively referred to as the
TCCUSGP, the Board found that each of the corporate credit unions in
the system met the requirements for assistance under Sec. 208 of the
Federal Credit Union Act. To maintain confidence in all corporate
shares, and prevent runs on any particular corporate, the NCUA Board
would have preferred having the option of involuntarily guaranteeing
all corporate shares through 2010. Because of the lack of authority to
address systemic risks, however, the Board was forced to implement the
TCCUSGP in two steps, using separate legal authorities: a short-term
involuntary guarantee until such time as each corporate could consider
whether it wanted a voluntary guarantee, followed by the long-term
voluntary guarantee.
In support of the involuntary temporary guarantee, the Board
determined that an emergency existed that required the NCUSIF provide
the corporates with an immediate share guarantee during a short time
period while the Board solicited a written voluntary guarantee
agreement with each participating corporate. The Board cited its
Sec. 203(a) power to requisition NCUSIF money ``for such . . . other
expenses incurred in carrying out the purposes of this title as it may
determine to be proper,'' combined with the Board's Sec. 209(a)(7)
incidental powers. 12 U.S.C. Sec. Sec. 1783(a), 1789(a)(7). The
authority for the long-term, voluntary share guarantee was found in
Sec. 208, as the voluntary guarantee was tantamount to a conditional
line of credit, or a loan, and specifically authorized under Sec. 208.
This two-step process for the share guarantee program was makeshift
and burdensome, and was also potentially disruptive for the system
because it relied on unanimous, voluntary participation for full
effectiveness. The NCUA could not require every corporate to
participate in the voluntary portion of the TCCUSGP, and a few
ultimately did not. The final outcome of this less-than-100 percent
participation remains to be seen.
2. Transaction account guarantees.
Also, as noted above, this past year the FDIC issued an interim
rule implementing a TLG program that provided an unlimited DIF
guarantee for non-interest bearing transaction accounts at insured
banks. This FDIC action provided assurance to businesses that
maintained large transaction accounts with balances in excess of
insured limits that, despite the uncertainties in the economy and among
depository institutions, they need not move or restructure their
accounts to in an effort to find a safe haven. The action also helped
to preserve liquidity and to encourage banks to continue lending
activities. To implement this DIF guarantee, the FDIC employed its
systemic risk authority, as the action included banks that were not in
specific danger of closing, and the FDIC extended the guarantee to all
banks on an involuntary basis. Some federally insured credit unions,
like banks, offer non-interest bearing transaction accounts, and the
NCUA Board considered taking action similar to what the FDIC had done
to guarantee those accounts. Lacking authority to take global action
based on systemic risk, the NCUA had no authority to pursue a similar,
global account guarantee at all federally insured credit unions, and so
was unable to provide a blanket guarantee to small business owners and
other entities with transaction accounts at credit unions.
With regard to the corporate credit union concerns and the various
guarantees discussed above, the credit union system as a whole would
have been better served if it had been able to employ a systematic risk
authority. Still, because the corporate credit unions are a small
universe, the Board was able to cobble together other legal authorities
to work around the lack of systemic risk authority. However, the next
time the NCUA needs to take systemic action for problems that could
occur within the universe of natural person credit unions, current
legal authorities might be inadequate to address this much larger
universe. Accordingly, it is important Congress consider providing NCUA
with systemic risk authority that parallels the authority of the
FDIC.\19\
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\19\ For example, to parallel the provisions of the FDIA
Sec. 13(c)(4)(G), Section 208 of the FCUA (12 USC Sec. 1788) could be
amended by inserting at the end thereof a new paragraph (d) to read as
follows:
(d) Systemic risk.
(1) Emergency determination by Secretary of the Treasury.
Notwithstanding subparagraphs (a), (b) and (c), if, upon the written
recommendation of the Board and the Board of Governors of the Federal
Reserve System (upon a vote of not less than two-thirds of the members
of such Board), the Secretary of the Treasury (in consultation with the
President) determines that--
(A) the Board's compliance with subparagraphs (a), (b) and (c)
with respect to an insured credit union would have serious adverse
effects on economic conditions or financial stability; and
(B) any action or assistance under this subparagraph would avoid
or mitigate such adverse effects, the Board may take other action or
provide assistance under this section as necessary to avoid or mitigate
such effects.
(2) Repayment of loss. The Board shall recover the loss to the
National Credit Union Share Insurance Fund arising from any action
taken or assistance provided with respect to an insured credit union
under clause (1) expeditiously from 1 or more emergency special
assessments on insured credit unions as the Board determines
appropriate.
(3) Regulations. The Board shall prescribe such regulations as it
deems necessary to implement this paragraph. In prescribing such
regulations, defining terms, and setting the appropriate assessment
rate or rates, the Board shall consider the types of credit unions that
benefit from any action taken or assistance provided under this
subparagraph, economic conditions, the effects on the credit union
industry, and such other factors as the Board determines appropriate.
(4) Documentation required. The Secretary of the Treasury shall--
(A) document any determination made under subparagraph (1); and
(B) retain the documentation for review under subparagraph (5).
(5) GAO review. The Comptroller General of the United States shall
review and report to the Congress on any determination under
subparagraph (1), including--
(A) the basis for the determination;
(B) the purpose for which any action was taken pursuant to such
subparagraph; and
(C) the likely effect of the determination and such action on the
incentives and conduct of insured credit unions and uninsured members.
(6) Notice.
(A) In general. The Secretary of the Treasury shall provide
written notice of any determination under subparagraph (1) to the
Committee on Banking, Housing, and Urban Affairs of the Senate and the
Committee on Banking, Finance and Urban Affairs of the House of
Representatives.
(B) Description of basis of determination. The notice under
subparagraph (6)(A) shall include a description of the basis for any
determination under subparagraph (1).
(7) Rule of construction. No provision of law shall be construed as
permitting the Board to take any action prohibited by paragraphs (a),
(b) or (c) unless such provision expressly provides, by direct
reference to this paragraph, that this paragraph shall not apply with
respect to such action.
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VI. CONCLUSION
The NCUA is committed to ensuring a safe and sound financial system
and appreciates the opportunity to provide input on legislation to
improve the country's Federal deposit insurance system. At a minimum,
Congress should act to permanently increase the deposit insurance
coverage level to $250,000, to increase NCUA's base borrowing authority
to $6 billion with emergency authority extending up to $30 billion, to
provide the NCUA with the authority to replenish the NCUSIF over a 5-
year period, and consider providing the NCUA with systemic risk
authority. These authorities will provide the agency with additional
tools to continue to deal with the serious economic challenges facing
all financial institutions.
______
PREPARED STATEMENT OF WILLIAM GRANT
Chairman and CEO, First United Bank and Trust,
on behalf of the American Bankers Association
March 19, 2009
Chairman Johnson, Ranking Member Crapo and members of the
Subcommittee, my name is William Grant, Chairman and CEO of First
United Bank and Trust. My bank is a 108-year old community bank,
headquartered in Oakland, Maryland--a rural town in Appalachia with a
population of about 2,000. We have assets of $1.6 billion, and serve
four counties in Maryland and four counties in West Virginia.
I am pleased to present the views of the American Bankers
Association (ABA), where I am a member of the ABA's deposit insurance
task force and where I serve on the America's Community Bankers
Administrative Committee. ABA works to enhance the competitiveness of
the nation's banking industry and strengthen America's economy and
communities. Its members--the majority of which are banks with less
than $125 million in assets--represent over 95 percent of the
industry's $13.9 trillion in assets and employ over 2 million men and
women.
We appreciate the opportunity to testify on The Depositor
Protection Act of 2009, S. 541, introduced by Chairman Dodd and
cosponsored by many other members of this subcommittee. That bill would
increase the FDIC's line of credit to Treasury from $30 billion to $100
billion. The ABA strongly supports this bill as it would provide the
FDIC with needed flexibility to manage the cash-flows in handling bank
failures and most importantly--because of this added flexibility--would
allow the FDIC to significantly reduce the special assessment on the
industry it has proposed for June 30, 2009.
Let me be very clear at the outset: the banking industry fully
supports having a strong FDIC fund and stands behind the efforts to
ensure FDIC's financial health. The industry has always taken our
obligation to the FDIC seriously, and banks will honor the obligation
to support the FDIC.
How this is accomplished is the critical question. The money to pay
such high expenses cannot be created out of thin air. It is very
important, therefore, to lower the upfront costs and spread the
obligation to FDIC over time. S. 541 helps to accomplish this.
Let me illustrate the impact of the FDIC special assessment: the
original proposed special assessment would pull over $15 billion from
the industry in the second quarter of this year. This is on top of the
regular risk-based quarterly premium paid by the industry which will be
between $3 billion and $4 billion each quarter. To give you a sense of
the magnitude of this cost, the industry's full year 2008 net income
was $16 billion. Even at half the cost, which the FDIC has suggested is
likely if S. 541 is enacted, it still will impose a substantial burden
on banks at the very time that they are making every effort to get
credit into local communities.
The special assessment is a significant and unexpected cost to all
banks that has the potential to devastate earnings. We are already
dealing with a deepening recession, accounting rules that overstate
economic losses and unfairly reduce capital, regulatory pressure to
classify assets that continue to perform, and a significant increase in
regular quarterly FDIC premiums. Each of these is a big challenge on
its own--but collectively, they are a nightmare. Adding another huge
one-time cost compounds this burden dramatically. Thousands of banks
like mine that never made a toxic subprime mortgage loan and have
served our communities in a responsible way for years and years are
being unfairly penalized. In fact, a small bank in Texas commented
recently: ``Is there not a better approach here than choking down the
small community banks that still have prudent underwriting standards
and are still trying to serve their long-term customers?''
Let me tell you the impact such a charge will have on my bank: the
proposed special assessment would cost my bank $2.47 million--all in
second quarter of 2009. This will reduce the bank's capital--which is
the base to support all our lending--by $1.64 million. This very high
and unexpected cost is in addition to the regular risk-based premium we
pay to FDIC, which is expected to be about $429,000 per quarter, or
$1.7 million for 2009. To put this in perspective, the regular premiums
are four times greater this year than last--not including the large
special assessment cost. This same story is being repeated across
thousands of banks in our country. Moreover, some areas, where the
economic conditions are even more problematic, this added burden will
make any new lending practically impossible.
I do want to be clear in saying that First United Bank & Trust will
meet its obligation to FDIC, regardless of the disposition of S. 541.
In doing so, however, we will encounter limits on our ability to lend
in our communities, support local functions and charities, and provide
jobs.
In fact, the special assessment is completely at odds with banks'
efforts to help communities rebuild from this economic downturn. This
assessment makes the cost of raising new deposits much higher, and
therefore, acts as a disincentive to raise new deposits. Fewer deposits
will hinder our ability to lend. The reduction in earnings will make it
harder to build capital when it is needed the most. Banks will also be
forced to look at ways to lower other expenses, which may limit their
ability to sponsor community activities or make charitable donations--
something most banks have done year after year. Some banks have told us
that they may even have to consider reducing bank staff in order to pay
for this high cost. In fact, a small community bank in Wisconsin, with
11 employees, commented that: ``The proposed assessment to us is
equivalent to the cost of one fulltime employee. We may not be able to
afford to keep existing staff. I'm concerned that we will be forced to
reduce our head count or certainly not be able to add staff as
planned.''
The implications for this significant FDIC charge will impact every
corner of my community, and indeed, every community the banking
industry serves. It is patently unfair and harmful to burden a healthy
bank like mine that is best positioned to help the economy recover.
Given the impact that the proposed assessment will have on banks and
their communities, it is critical to consider alternatives that would
reduce the burden and provide the FDIC the funding it needs in the
short-term. S. 541 is an extremely important step in this direction as
it would enhance FDIC's ability to draw on working capital, if
necessary, and enable the FDIC to reduce the special assessment
considerably.
Importantly, the FDIC does not intend to use the line of credit at
all unless the economy deteriorates even more dramatically than
anticipated. If it does draw on it, it is a borrowing that must be
repaid by the industry_with interest. This obligation of the industry
is often lost in the discussion about government support and confused
with taxpayer losses. Nothing is further from the truth. The banking
industry stands fully behind the FDIC and remains committed to assuring
its financial health. The FDIC has been funded completely by banking
premiums since it came into existence in 1933. All the costs of bank
failures and all the personnel and other program costs have been borne
by the industry. It has been the healthy banks which have had nothing
to do with the excessive risk-taking of banks that have failed that end
up bearing the cost. While the industry is prepared to meet its
obligations, in this difficult time it is critical to reduce the impact
and spread the cost over a long period of time. This is why enacting S.
541 is so important and so urgently needed.
In my statement today, I'd like to focus on three main ideas:
The banking industry is committed to assuring that the FDIC
is financially secure. Banks have always paid the full cost of
FDIC. Since the industry will bear the full cost of any FDIC
expenses, it is a question of timing of the payments and
balancing the impact of any payment on the ability of banks to
lend in their communities.
The FDIC special assessment is a significant burden that
will impact earnings, capital, and cost of funds--all of which
makes it far more difficult to lend. The cost of rebuilding the
deposit insurance fund needs to be reduced and spread out over
time.
The $100 billion line of credit is critical to reducing
FDIC assessments on banks. ABA fully supports S. 541 and urges
quick action to enact it.
I will cover each of these in turn.
I. The Banking Industry is Committed to Assuring that the FDIC is
Financially Secure
The banking industry knows how important deposit insurance is to
our customers. In fact, the very rapid growth in deposits over the last
quarter, indeed the last year, shows just how valuable this additional
level of security is to bank customers. It is no wonder that depositors
feel this way as no insured depositor in a failed bank has ever lost a
penny. Perhaps less well-known is that bank premium payments have paid
all the costs of the FDIC--including all the personnel and
administrative costs to run the agency (which is in excess of $1
billion per year) and all the bank failure costs.
The industry remains committed to assuring the financial strength
of the FDIC. The industry had built up the Deposit Insurance Fund (DIF)
to over $50 billion by the end of 2007. The housing market collapse and
rapidly deteriorating economy have resulted in 25 bank failures last
year and 17 this year. The IndyMac failure on July 11, 2008 was
particularly costly--subtracting about $10 billion from the DIF. As a
result of these losses, the DIF reserve ratio (the fund divided by
insured deposits) fell to 0.40 percent at the end of the last year.
This was due not only to the rapid growth in insured deposits, but more
importantly reflects the fact that the FDIC has set aside over $22
billion from the fund to pay for losses expected in 2009. These
reserves are not included in the calculation of the reserve ratio.
Thus, in total, the FDIC has $41 billion in resources--$22 billion for
possible failures plus $19 billion in the fund to cover additional
unexpected costs.
In February 2006, Congress made important improvements that allowed
the FDIC greater flexibility to manage the insurance fund and authority
to enhance the risk-based premium system. Unfortunately, there was
little time to allow this system to become fully operational before
this severe economic downturn began to take its toll. Nonetheless, the
reform act of 2006 continues to provide a solid base for rebuilding and
maintaining the FDIC deposit insurance fund.
Under the new rules, the banking industry pays quarterly premiums
that are set to reflect differences in ``risk'' of the banks,
determined by a combination of bank examiner ratings and financial
ratios. Under that system, premiums paid this year will raise about $12
billion. This represents a fourfold increase in premiums from last
year. For banks located in more economically distressed areas, the
risk-based increase is likely to be even higher. Bank examiners have
also been very critical of banks (particularly in these areas) even
though most of the banks in these regions remain well-capitalized and
ready to lend. The expense will adversely affect a bank's earnings,
perhaps leading to a CAMELS downgrade and a higher FDIC insurance
premium, where the cycle begins again.
In spite of these challenges, banks had planned for and budgeted
for the increase expected in quarterly premium assessments. However,
the huge special one-time assessment announced on February 27, 2009 was
unexpected. The negative consequences of this change--all at once--will
be dramatic.
The industry is prepared to do its part and pay for 100 percent of
the insurance needed to preserve confidence in our industry. The only
issue is one of timing. S. 541 will be very helpful in providing the
industry with the time needed to fund the DIF while at the same time
enabling the industry to meet the needs of our communities.
II. The FDIC Special Assessment is a Burden That Will Significantly
Impact Earnings, Capital, and Cost of Funds--All of Which Makes
it Far More Difficult for Banks to Lend
The FDIC is proposing to siphon funds out of the banking system at
precisely the time that it and other parts of the government are trying
to pump money in. This is the ultimate in mixed messages and will
significantly undermine the effectiveness of the other programs. It
would be far better to adopt a plan that would enable banks to fund the
system at a time when higher insurance premiums will not jeopardize an
already fragile economy.
The $41 billion already at the FDIC and $12 billion a year ($60
billion over 5 years) in risk-based premiums should be sufficient--
under current economic assumptions--to cover the FDIC's estimated $65
billion in losses over the next 5 years and rebuild the DIF back to its
normal operating range. The FDIC has told the industry, however, that
the special assessment is needed as an additional layer of protection
against the possibility that losses this year and next may be greater
than anticipated, leaving the agency with less flexibility to manage
the cash-flow required to satisfy insured-depositor claims.
Let me again be very clear: the banking industry will meet its
commitment to fully fund the FDIC. We appreciate the difficult
situation that the FDIC is in, and understand that rising losses from
bank failures have created short-term funding needs. The industry has
always taken our obligation to the FDIC serious and banks will honor
the obligation to support the FDIC. It is a matter of timing that is
the issue here, not the obligation. Thus, how the repayment is done,
and over what time period, is the critical question.
Here's an example of how many bankers feel:
From an Illinois community bank ($425 million in assets):
``The FDIC seems to be failing to realize that most community
banks continue to serve as a stable foundation for lending to
businesses and individuals. By imposing this assessment, the
FDIC is placing further strain on the institutions that have
great potential to help pull our nation out of this financial
crisis. Wall Street has been rewarded, and now Main Street is
being penalized.''
From an upstate New York community bank ($500 million in
assets): ``We annually provide over $100 million in loans to a
wide range of businesses, consumers and homeowners. We truly
operate the way a main street bank should, safely and
profitably, all with an focus on supporting the community in
every way possible. We never issued a subprime mortgage,
purchased private label CMOs or MBSs. Basically, we did what we
were supposed to do. This year we estimated that our FDIC
insurance premiums were going to increase to $610,000 up
approximately $410,000 from 2008. While we were extremely
disappointed that banks that operated very poorly, without
prudent controls and with an eye for ever greater profits at
the expense of everything else, were the source of the
increase, we understood that all must share in the pain if this
Country is going to move forward. However, the increases in
premiums being proposed now will increase our costs another
$950 thousand. This is not acceptable!
The money to pay such high expenses must come out of earnings or
reductions in expenditures. Banks will also be forced to look at ways
to lower other expenses, which means less lending, fewer sponsorship of
community activities, fewer donations to local charities, and in some
banks, reductions in staffing. The implications for this significant
FDIC charge will impact every community. Spreading the costs over a
long period of time is the best method to minimize disruptive effects.
Alternatives are clearly needed to help ease this burden on all banks.
III. The $100 Billion Line of Credit is Critical to Reducing FDIC
Assessments on Banks
Enacting S. 541 will provide the necessary flexibility to the FDIC
to continue to meet its responsibilities without extracting significant
funds from the banking industry that could be better used to facilitate
loans in banks' communities. S. 541 would increase the FDIC's line of
credit to Treasury from $30 billion to $100 billion and provide for
additional flexibility for the FDIC to borrow beyond that under
extraordinary circumstances. What is not well understood is that the
FDIC's ability to borrow for working capital (to handle the cash needs
in resolving bank failures) is directly related to the level of the
fund and the (current) $30 billion line of credit. Thus, increasing
that line to $100 billion significantly increases the FDIC's working
capital line.
The last time the line of credit was increased was in 1991, when
Congress increased it from $5 billion to $30 billion in the FDIC
Improvement Act. At that time, Congress also provided for working
capital that, as I mentioned, is many multiples of (roughly nine times)
the $30 billion line of credit plus the fund balance. Since that time,
the banking industry has more than tripled in total assets; thus,
setting a new line of credit at $100 billion is consistent with the
growth of the industry.
By expanding the flexibility to access working capital, the FDIC
has less immediate need for cash from the industry as a buffer against
unexpected losses. Thus, rather than pull $15 billion out of the
industry, the FDIC has suggested that it could cut that level in half
and have sufficient funding. Of course, even at half the proposed rate,
the cost is significant, and we continue to look for ways to eliminate
the upfront cost or, if it cannot be eliminated, at least lower it
significantly and certainly spread it out over a much longer period of
time. We emphasize that the special assessment is on top of
significantly elevated risk-based premiums.
The FDIC should assess premiums to recapitalize the insurance fund
over a reasonable period, keeping in mind the present need to keep
capital in the system to increase stability and to bolster lending.
Recently, the FDIC extended the recapitalization period for the reserve
ratio to return to the statutory level of 1.15 percent from 5 years to
7 years. The FDIC should consider extending the recapitalization period
further, to at least 10 years, and be reassured that the industry
remains fully committed to bringing the fund back to required levels as
conditions improve.
Policymakers should consider other options to help stretch out the
repayment period for banks. One option to consider is a funding source
like the Financial Corporation (FICO) bonds issued from 1987 to 1989 to
pay for the costs incurred by the Federal Savings and Loan Insurance
Corporation (FSLIC) from savings association failures in the late
1980s. These were a series of 30-year bonds with an aggregate principal
of $8.2 billion. This helped to spread out the cost of failures at that
time. Other types of borrowing or even capital investments by banks in
the FDIC should be considered. Having options in place is important so
that there is a viable mechanism to provide the FDIC with capital to
offset losses, yet have the commitment of the banking industry to repay
any temporary funding over a long period of time.
On a final note, let me say that the banking industry, like all
businesses, is working hard to cut costs and make sure our operations
are as efficient as possible. We believe that the FDIC should do the
same. Thus, we urge the FDIC to continue seeking the least-cost
resolution of failed institutions and provide details so the industry
and public understand the costs incurred. Moreover, the FDIC should
reduce all other unnecessary expenses, keeping in mind that every
dollar the FDIC spends comes out of the insurance fund.
Conclusion
The ABA fully supports a strong, financially secure FDIC fund in
order to maintain the confidence depositors have in the system. The
banking industry has been responsible for all of the FDIC's cost since
its inception in 1933. We appreciate the desire on the part of the FDIC
to have an extra layer of protection in this difficult environment with
so much uncertainty about the number and cost of bank failures.
However, how this is done is very important to every bank and every
community we serve. The special assessment is a significant and
unexpected cost to banks that will devastate earnings and reduce
lending so critical to our economic recovery. Therefore, the ABA fully
supports S. 541 and urges quick action to enact it into law.
______
PREPARED STATEMENT OF TERRY WEST
President and CEO of Vystar Credit Union,
on behalf of the Credit Union National Association
March 19, 2009
Thank you, Chairman Johnson, and Ranking Member Crapo, for the
opportunity to appear before the Subcommittee today on behalf of the
Credit Union National Association on issues relating to deposit
insurance.
I am Terry West, President and CEO of VyStar Credit Union in
Jacksonville, Florida. I am also serving as the Chairman of CUNA's
Corporate Credit Union Task Force, which was formed to address concerns
regarding corporate credit unions, institutions that provide payments,
settlement, liquidity and investment services for natural person credit
unions. The Credit Union National Association is the largest advocacy
organization for credit unions in this country, representing the
nation's 7,900 State and Federal credit unions, which serve
approximately 92 million consumers.
VyStar CU
VyStar is a State-chartered, federally insured credit union serving
the Jacksonville community; we have approximately 350,000 members and
$3.8 billion in assets. I am pleased to report that VyStar continues to
be an important source of lending as well as a variety of financial
services to our members during this period of economic crisis, offering
a variety of loan products, including 30-year mortgage loans where we
pay up to $5,000 no closing costs at 5.375 percent, and small business
loans. We also help our members modify existing loans and work with
them to provide financial counseling and restructure their debt,
particularly for those facing job losses or a reduced income. In
addition, we help over 9,000 small businesses in our area meet their
financial needs through deposit and loan services. We are also just now
launching a Money Makeover on local television aimed at teaching
consumers how to reduce debt and save, especially during this economic
crisis.
Background on Natural Person and Corporate CUs
I am even more pleased to report that VyStar's efforts are being
repeated in communities all across this country by the nation's State
and Federal credit unions, as highlighted by the Wall Street Journal
supplement on Sunday, March 15th. As the article points out, credit
union loans in 2008 rose by 7 percent to over $575 billion, up about
$35 billion from the previous year. Meanwhile, banks in this country
saw loans decline about $31 billion in 2007, from $7.9 to $7.876
trillion, as the Journal reported. I have attached a copy of the
Journal article. While credit unions are generally performing well,
some natural person credit unions in States such as California,
Florida, Arizona, Nevada and Michigan are facing real stresses,
including capital reductions, primarily as a result of the collateral
damage from their respective economic environments.
The corporate credit union network has been particularly hard hit,
due in part to the impact of mortgage-backed securities, which are
permissible investments for the corporate credit unions, on their net
worth. These concerns are highly relevant to the Subcommittee's
consideration of deposit and share insurance because they have a direct
impact on the costs of insurance to credit unions that is provided by
the National Credit Union Share Insurance Fund (NCUSIF).
The NCUSIF
Like the Federal Deposit Insurance Corporation (FDIC), the NCUSIF
provides account insurance, backed by the full faith and credit of the
U.S. Government, to the institutions it covers. However, the NCUSIF
differs from the FDIC in one very important way. The FDIC is generally
funded by assessing premiums to insured banks. The costs of the NCUSIF
are borne by federally insured credit unions, which must provide and
maintain with the NCUSIF 1 percent of their insured shares. Federally
insured credit unions may also be assessed an insurance premium, up to
twice a year, to bring the NCUSIF to its normal operating level, which
is set by the NCUA Board within a range of 1.2 percent to 1.5 percent,
as directed by the Federal Credit Union Act (``FCU Act'' or ``Act'').
The current level is 1.3 percent. If the NCUSIF equity level falls
below 1.2 percent, a premium must be assessed under the Act.
This system has many positive features. It reflects the self-help,
cooperative nature of the credit union system by calling on federally
insured credit unions to serve as the first line of defense against
insurance losses before any taxpayer funds would ever become involved.
However, the current economic crisis has also exposed some dangers in
the system. In particular, when, as now, the industry faces a general
economic downturn, and individual credit unions need their capital the
most to support continued lending to local communities, the insurance
fund can impose sudden, large, and unexpected drains on the capital of
credit unions all across the country. This, in turn, can limit the
continuing ability of credit unions to carry on their core functions
just when they are needed most. Some of the reforms proposed below are
designed to mitigate this problem.
NCUA's Actions To Assist Corporate CUs
Because the National Credit Union Administration (NCUA) took action
in January to provide $1 billion in capital to the largest corporate
credit union, U.S. Central, and to guarantee the uninsured shares of
corporate credit unions, all federally insured credit unions have been
hit with an estimated 80 plus basis points in insurance expenses this
year and an average 62 basis point hit to federally insured credit
unions' return on assets (ROA). This is comprised of more than 50 basis
points to restore the 1 percent deposit and the remainder in the form
of a premium assessment.
CUNA did not oppose NCUA's action in January to help the corporate
credit unions, which we felt was necessary. However, we did not support
the agency's decision as to how the costs would be funded or when they
had to be recognized for accounting purposes. We believe NCUA did not
thoroughly consider alternatives to contain those costs for the credit
union system.
As a result of NCUA's actions, a very large number of credit unions
will experience negative ``bottom lines'' or ``net income'' and all
will see their net worth decline, solely because of the insurance
expenses.
On February 27, 2009, the FDIC issued an interim final rule with a
request for comments calling for an emergency 20 basis point special
insurance assessment in June and possibly an additional assessment of
up to 10 basis points thereafter. Bankers objected to the amount and
according to the Washington Post and others, the FDIC has agreed to
mitigate the impact of the assessment cutting it in half to 10 basis
points. The FDIC has also adopted a rule that allows it up to 7 years
to bring the reserve ratio of its Deposit Insurance Fund up to 1.15
percent. This will allow the agency, under its ``extraordinary
circumstances'' authority, to spread out future assessments for
federally insured banks and thrifts for two additional years. The
agency also made changes to its assessment rate regarding its Temporary
Liquidity Guarantee Program that will help reduce insurance
assessments.
Actions to Mitigate CUs Costs That Do Not Require Legislation
We believe there are steps of a similar nature and effect that NCUA
could take to help minimize the impact of insurance costs on federally
insured credit unions. For example, while the 1 percent equity level in
the NCUISF arguably must be replenished in the same year that it is
drawn down, the NCUA Board currently has authority under the FCU Act to
spread out credit unions' premium expenses that fund the remaining .30
percent balance of the NCUSIF to bring the ratio to 1.30 percent. We
urge this Subcommittee to encourage NCUA to use its current authority
to help reduce the impact of insurance costs on federally insured
credit unions this year.
We also note that limited assistance--up to $10 billion--from the
Treasury's Troubled Assets Relief Program (TARP), or Financial
Stability Plan (FSP), to the NCUSIF and to a small number of individual
credit unions could be extremely important in helping to blunt the
impact of the insurance expenses on the credit union system. We believe
such funding, which would be fully repaid by the credit union system in
a reasonable amount of time, is appropriate under the circumstances.
Some banker groups have had the temerity, given where certain banks are
regarding TARP money, to charge that credit unions' tax exemption would
be threatened if we receive such funds. In our view, this should not be
the case, because any funds from TARP would be reimbursed. Further,
Treasury has developed a TARP program specifically for Subchapter S
Banks, which receive very favorable tax treatment. No one is suggesting
that this step undermines their generous tax benefits the Subchapter S
banks receive from the Federal Government. While this hearing is not
focusing on accounting issues, the impact of accounting rules regarding
fair value and assets that have to be reported as ``other-than-
temporarily impaired'' have taken their toll on the credit union
system, along with others in the financial system, particularly for
corporate credit unions. While positive developments from the Financial
Accounting Standards Board (FASB) are in the offing, we urge the Senate
to remain vigilant and keep the pressure on FASB to address these
issues in a timely and effective manner.
Legislation is Needed
We also think it is imperative that NCUSIF have the statutory
authority it needs to address insurance issues and manage insurance
costs, both to facilitate its operations and to help credit unions
handle their expenses. This is particularly important in light of the
current financial crisis. More specifically, CUNA is supporting the
following:
Legislation to continue share and deposit coverage for
accounts up to $250,000. We feel this additional coverage has
provided consumers with needed confidence in their financial
institutions and hope the Senate will continue the current
level of account insurance.
Increased authority for the NCUSIF to borrow up to $6
billion from the U.S. Treasury to facilitate its ability to
spread out insurance costs to credit unions. The FDIC is
seeking an increase in its borrowing authority from $30 billion
to $100 billion, with additional authority to borrow up to $500
billion with the concurrence of the Federal Reserve Board and
the Treasury Department, in consultation with the President.
NCUA has much more limited borrowing authority, which has not
been increased from $100 million since the NCUSIF was created
in the 1970s. As credit unions continue to be affected by the
economy, and in recognition of the $250,000 insurance ceiling
which may be extended, thereby increasing the NCUSIF's
exposure, we urge the Senate to increase the NCUSIF's borrowing
authority. We also support additional authority for the NCUSIF
under exigent circumstances, which would allow it to borrow an
additional amount, up to $30 billion, that we urge the Senate
to approve for the NCUSIF.
Authority for the NCUSIF to allow federally insured credit
unions to spread out premium expenses for a period of up to 8
years. CUNA strongly believes that NCUA has authority now to
spread out about 30 basis points in insurance expenses for a
reasonable period of time, without any new legislative
authority, and we urge this Subcommittee to encourage NCUA to
use that authority. However, we also support legislation that
would expressly permit NCUA to collect credit unions' premium
costs over 8 years, as the FDIC would be permitted to do. This
change would provide an extremely important mechanism that
would allow NCUA to manage its resources more effectively while
lessening the impact of assessments on federally insured credit
unions.
Enhanced authority for NCUA through its Central Liquidity
Facility (CLF) to provide liquidity to all member credit
unions, both natural person and corporate credit unions, and
capital to those member credit unions that represent systemic
risk to the NCUSIF. Such additional authority would provide
another mechanism the NCUA Board could employ to spread out the
costs associated with problem cases that are paid by credit
unions. Authority for the program, which would be funded
through the CLF's borrowing authority and that of the NCUSIF,
would end after 7 years. Borrowings would be repaid from within
the credit union system. The NCUA Board would be directed to
write regulations to implement the program and NCUA's
implementation would be subject to Congressional review.
Systemic risk authority to NCUA, on a similar basis to that
provided to FDIC. While we cannot imagine that Congress
intended NCUA would not have such authority, the FDIC was able
to point to specific provisions in its Act to provide unlimited
deposit insurance coverage for non-interest bearing transaction
accounts. Without a specific systemic risk provision, NCUA has
been reluctant to take this action, even though we believe NCUA
has such authority to act on a case-by-case basis under 12
U.S.C. 1788. We believe that given the uncertainty of the
economic crisis, parallel authority for NCUA to address
systematic risk issues in a timely fashion is reasonable.
Conclusion
While CUNA is supporting additional resources for the NCUSIF and
urging Congress to help with other issues, such as mark-to-market
accounting, that will have an impact on the credit union system
including corporate credit unions, we are also supporting regulatory
changes in the corporate credit union system that will substantially
strengthen their capital, reduce their numbers to increase
efficiencies, focus their services on core activities that are needed
by natural person credit unions, and address corporate governance
issues. All of these changes are designed to prevent problems of the
nature and magnitude that the credit union system is currently facing.
In closing, Mr. Chairman, Ranking Member Crapo and all the members
of this Subcommittee, we appreciate your review of these issues today.
Every day, credit unions reinforce their commitment to workers and a
host of others seeking to better their quality of life by providing
them loans on terms they can afford and savings rates that are
favorable. We hope you agree that credit unions and other institutions
that continue to do the right thing, despite impediments, should not be
disadvantaged by the political process. We look forward to working with
you to help ensure the credit union system continues to be a ``safe
haven'' for the 92 million individuals and small businesses who look to
their credit unions for financial services. I would be happy to respond
to your questions.
SAFE HAVENS: CREDIT UNIONS EARN SOME INTEREST
The Wall Street Journal, March 15, 2009
By Jonnelle Marte
Cash isn't exactly flowing like it used to. The stock market can't
find a bottom. Big banks have become wards of the government while
smaller banks are failing at a rate of about one a week. Savers worry
about the institutions where their cash is parked, while people who
need to borrow scramble to find willing lenders.
Buffeted in every direction by the continuing financial Katrina,
more and more savers and borrowers are finding a safe harbor in the
sleepiest, most unexciting corner of the financial world: credit
unions. Often, it's right in their office, maybe a couple of floors
down or at the end of the hall.
Long a haven for cash-strapped workers, car buyers and Christmas-
club savers, the nation's 8,000 credit unions are gaining new stature
as reliable sources of lending in the tempest-tossed credit market.
Seeking Savers and Borrowers
They've also wooed consumers by offering a win-win combination of
generally higher interest rates for savings accounts and lower rates
for loans, when compared to most banks.
Tim Foley
Typical spreads: Right now, a 1-year certificate of deposit at a
credit union pays about 2.29 percent versus 1.74 percent at a
commercial bank, according to Datatrac, a financial research firm that
analyzes interest rates for banks and credit unions. A home-equity line
of credit at a credit union charges an average of 4.41 percent compared
to 4.77 percent for banks--but banks charge slightly less for a 30-year
fixed-rate mortgage with a 5.33 percent rate, compared with the 5.39
percent charged by credit unions.
Membership in credit unions rose to almost 90 million in 2008, from
85 million in 2004. And the loans on their books topped $575 billion in
2008, up from $539 billion in 2007. By comparison, 8,300 U.S. banks saw
loans outstanding decrease $31 billion last year, to $7.876 trillion
from $7.907 trillion in 2007.
Stephen Birkelbach joined the Community First Credit Union in
Jacksonville, Fla., 3 years ago when he was shopping for a car.
``Community First not only had the best rate,'' says Mr. Birkelbach,
who at the time transferred over the accounts of his local carpet-
cleaning business. ``I was so impressed with the customer service and
the up-front attitude I moved everything over to them.''
Mr. Birkelbach financed a truck with the credit union a year later.
Then he refinanced his mortgage in January. He says he couldn't find
another financial institution that would match the 4.25 percent
interest rate he got at his credit union.
Like the rest of the financial universe, credit unions can't help
feeling pinched, but they've maintained stability and--so far--aren't
being propped up with Federal money. (Although there is a plan to
support 28 special ``corporate'' or ``wholesale'' credit unions that
provide financing and other services to smaller ``retail'' credit
unions.)
Only two retail credit unions have closed so far this year. Of the
15 credit unions that were liquidated in 2008, nine were due to real-
estate problems, according to the National Credit Union Administration,
the government agency that regulates federally insured credit unions.
``At this point the [credit union] industry is solid,'' says Karen
Dorway, president and director of research for BauerFinancial, a firm
that analyzes banks and credit unions.
Credit unions have largely avoided the banking world's turmoil by
sticking to their plain-vanilla business model: taking in deposits from
owner-members and lending the money back out to them. And they're
writing more loan checks than they have in years--still mainly for home
and auto loans, but for more business loans, too.
``Credit unions have not changed their standards so if you could
get a loan 5 years ago, you can get a similar loan today,'' says Daniel
Penrod, industry analyst for the California and Nevada Credit Union
Leagues.
Loan Activity on the Rise
Loan growth has been robust--especially with first mortgages and
used-auto loans. Last year's 7 percent growth in loans at credit unions
was higher than the 2 percent growth seen in previous recessions, says
Mike Schenk, senior economist for the Credit Union National
Association, the industry trade association.
``We've been able to stay in the game,'' he says.
But that doesn't mean credit unions are immune to the troubled
economy. Loan delinquencies are up--especially in housing-bust areas of
Nevada, California, Arizona and Florida--but they are still far from
the levels seen at most banks.
Nationwide, loan delinquencies for credit unions hit an estimated
1.45 percent in January, double the 0.68 percent rate from 2006, but
less than half the 2.93 percent national delinquency rate for banks.
Here are few more things you may want to know:
Joining: Credit unions require members to have something in common,
such as a neighborhood, school, workplace or church. Larger credit
unions offer a full menu of banking services, from checking accounts to
mortgages. Smaller credit unions may have more limited services. Most
credit unions will let you open a savings account with just $25; but
only members can take out loans. Use the online finder at
www.FindaCreditUnion.com.
Deposit Insurance: The National Credit Union Administration is the
Federal agency that regulates federally insured credit unions, which
include all Federal credit unions and most State credit unions. The
Federal insurance is through the National Credit Union Share Insurance
Fund and the insurance limits are the same as at banks. As at banks,
coverage is higher if the money is in different types of accounts, such
as a regular share account and an individual retirement account.
Do some research: Compare credit unions and banks in your area by
reviewing ratings at Bankrate.com/brm/safesound/ss_home.asp and
Bauerfinancial.com/btc_ratings.asp. BankRate's reports are free but
Bauer charges, with prices starting at $10. Both rate banks and credit
unions by looking at qualities like capital ratio, loan delinquency and
liquidity.
______
PREPARED STATEMENT OF STEPHEN J. VERDIER
Senior Vice President and Director of Congressional Relations Group,
on behalf of the Independent Community Bankers of America
March 19, 2009
Chairman Johnson, Ranking Member Crapo, members of the
Subcommittee, I am Stephen J. Verdier, the Senior Vice President, and
Director of Congressional Relations Group for the Independent Community
Bankers of America (ICBA). I am pleased to represent the ICBA and its
5,000 community bank members atthis important hearing on ``Current
Issues in Deposit Insurance.''
ICBA commends the Committee for conducting a hearing on deposit
insurance issues at this critical time in our history. The current
crisis demands bold action, and we recommend the following:
ICBA strongly believes that now is the time for Congress
and the FDIC to address the inequities between large and small
banks in the deposit insurance system.
ICBA strongly believes Congress should require a systemic
risk premium be assessed against the ``too big to fail''
institutions to compensate the taxpayers and the Federal
Deposit Insurance Corporation (FDIC) fund for the risk exposure
these companies represent because of their size and activities.
Part of the premium could also be used to pay for the cost of
improved regulation of the systemic risk institutions. The
superior coverage received by depositors, other liability
holders and even shareholders of ``too big to fail''
institutions alone justifies the premium.
The amount of assets a bank holds is a more accurate
gauge of an institution's risk to the FDIC than the amount of a
bank's deposits. Under the current system that assesses
domestic deposits, community banks pay approximately 30 percent
of FDIC premiums, although they hold about 20 percent of bank
assets. And while community banks fund themselves 85-95 percent
with domestic deposits, for banks with more than $10 billion in
assets the figure is 52 percent. Thus, while community banks
pay assessments on nearly their entire balance sheets, large
banks pay on only half. ICBA believes that it would be fairer
if the FDIC were to use assets minus tangible equity (to
encourage higher levels of tangible equity) as the assessment
base instead of domestic deposits. Congress should require this
change.
Congress should also repeal a provision in the 2006
deposit insurance reform law that protects ``too big to fail''
banks from being assessed fairly for deposit insurance.
In response to the strains on the Deposit Insurance Fund
(DIF), the FDIC has proposed to more than double last year's
base assessment rate and also to impose a special assessment of
20 basis points due on September 30, 2009. ICBA opposes this
special assessment. When combined with the regular assessment
rate for 2009, the special assessment will be detrimental to
most community banks' earnings and capital and will adversely
affect their ability to lend and serve their communities.
ICBA supports increasing the FDIC's standby line of
credit with Treasury, as provided in S. 541, the Depositor
Protection Act of 2009. According to FDIC Chairman Bair, the
increased borrowing authority under S. 541 would allow the FDIC
to reduce this special assessment to as much as one-half of the
proposed rate.
ICBA appreciates Chairman Bair's commitment to a
reduction in the special assessment, if S. 541 becomes law.
Nevertheless, ICBA urges the FDIC to seek alternatives to the
special assessment, such as borrowing from Treasury or the
industry or issuing bonds, to temporarily fund the DIF, with
the industry repaying the amount borrowed, with interest. This
would keep needed capital within our communities for lending.
The DIF will still be industry-funded if the FDIC uses its
borrowing authority, but the industry would be able to spread
the cost of funding the DIF over time.
ICBA supports provisions in H.R. 1106, the Helping Families
Save Their Homes Act, to make permanent the increase in deposit
insurance coverage from $100,000 to $250,000.
ICBA urges Congress to make permanent the unlimited
coverage for transaction accounts, which is now temporarily
provided by the FDIC under its Temporary Liquidity Guarantee
Program. Both this program and the increase to $250,000 have
not only bolstered depositor confidence in FDIC insured
institutions, but they have helped community banks compete for
deposits against ``too big to fail'' banks and money market
mutual funds.
ICBA supports a provision in H.R. 1106 to allow the FDIC to
ensure holding companies with significant non-bank assets pay
their fair share of any deficit in the FDIC's Temporary
Liquidity Guarantee Program.
Deposit Insurance is Fundamental to a Sound Economy
Deposit insurance has been the stabilizing force of our nation's
banking system for 75 years. It promotes public confidence by providing
safe and secure depositories for both businesses and consumers. Some 85
to 90 percent of community bank funding comes from domestic deposits.
As a result, the Federal deposit insurance system also provides
important protection to the funding base for community banks.
A strong FDIC is a fundamental element of the American banking
system and a sound economy. A strong FDIC gives the public confidence
their deposits aresafe in the nation's 8,400 banks and savings
associations. Unfortunately, there are inequities in the deposit
insurance system that unfairly put community banks at a competitive
disadvantage with respect to their larger competitors, particularly,
the ``too big to fail'' banks.
Congress Should Address Inherit Inequities in the Deposit Insurance
System
In the last twelve months, the Federal Government, faced with the
most severe financial crisis since the Great Depression, has taken
unprecedented measures to bolster a faltering financial services
industry. While these actions were justifiable steps to protect the
national economy, the past twelve months have exposed what community
banks have always known to be true: the ``too big to fail'' banks enjoy
a vastly superior form of protection from the Federal Government than
the too-small-to-save community banks. The depositors of the ``too big
to fail'' banks have unlimited deposit insurance coverage. They have no
reason to fear a bank failure will diminish the amount of funds held in
``too big to fail'' banks because the Federal Government will not allow
those banks to close. The protection for the ``too big to fail'' banks
extends to other liability holders and often their shareholders. Yet,
the ``too big to fail'' banks pay nothing extra for this superior
coverage. ICBA strongly believes now is the time for Congress and the
FDIC to address the inequities between large and small banks in the
deposit insurance system.
Systemic Risk Premium
The government has dedicated more than $150 billion in taxpayer and
FDIC funds to shore up the nine largest banks. ICBA strongly believes
Congress should require a systemic risk premium be assessed against the
``too big to fail'' institutions to compensate the taxpayers and the
FDIC fund for the risk exposure these companies represent because of
their size and activities. Part of the premium could also be used to
pay for the cost of improved regulation of the systemic risk
institutions. The superior coverage received by depositors, other
liability holders and even shareholders alone justifies the premium. As
part of this effort, Congress should also repeal a provision in the
2006 deposit insurance reform law that protects these ``too big to
fail'' banks from being assessed fairly for deposit insurance.
FDIC Assessment Base Must be Changed
Currently, the FDIC assesses deposit insurance premiums against all
domestic deposits in banks and thrifts. This assessment base unfairly
burdens communitybanks by requiring community banks to pay a
disproportionately high share of deposit insurance premiums.
Bad assets, not deposits, cause bank failures, and all forms of
liabilities, not just deposits, fund a bank's assets. The amount of
assets that a bank holds is a more accurate gauge of an institution's
risk to the FDIC than the amount of a bank's deposits. Under the
current system that assesses domestic deposits, community banks pay
approximately 30 percent of FDIC premiums, although they hold about 20
percent of bank assets. And while community banks fund themselves 85-95
percent with domestic deposits, for banks with more than $10 billion in
assets the figure is 52 percent. Thus, while community banks pay
assessments on nearly their entire balance sheets, large banks pay on
only half.
ICBA believes it would be fairer if the FDIC were to use assets
minus tangible equity (to encourage higher levels of tangible equity)
as the assessment base instead of domestic deposits. Changing the
assessment base does not change the amount of revenue the FDIC will
receive. It only changes how the premium assessments are distributed
among FDIC institutions. Under the asset-oriented assessment base,
community banks would bear their proportionate share, orabout 20
percent of deposit insurance premiums rather than the current 30
percent. If the assessment base were broadened, as urged by ICBA, the
special assessment would be reduced to 12 basis points.
In connection with the proposed special assessment, the FDIC has
asked for comments on whether, for purposes of the special assessment
only, the FDIC should use the asset-oriented assessment base. ICBA
strongly believes the FDIC should use the asset-oriented assessment
base for any special assessment and Congress should make the asset-
oriented assessment base a permanent part of the deposit insurance
system for all assessments.
Special Assessment Issues and Borrowing Authority under S. 541, the
Depositor Protection Act of 2009
The current severe recession has put pressure on the FDIC's Deposit
Insurance Fund due to bank failure losses. The FDIC projects further
losses could severely strain the FDIC's resources, potentially
undermining public confidence in Federal deposit insurance. The FDIC
has always been funded by the banking industry, and community banks are
willing to do their part to recapitalize the DIF to safer levels.
However, the FDIC must maintain a balance between recapitalizing the
DIF and ensuring assessments charged to banks for deposit insurance do
not reach counterproductive levels that would divert capital needed for
lending to promote economic recovery in our communities.
In response to the strains on the DIF, the FDIC has proposed to
more than double last year's base FDIC assessment rate and also to
impose a special assessment of 20 basis points due on September 30,
2009. These assessments would increase the DIF reserves by $27 billion,
with the special assessment bringing in about $15 billion by itself.
ICBA opposes this special assessment. When combined with the regular
assessment rate for 2009, the special assessment will be detrimental to
most community bank's earnings and capital and will adversely affect
their ability to lend and serve their communities. The FDIC itself
estimates the 20-basis-point special assessment would reduce aggregate
2009 pre-tax income for profitable banking institutions by 10 to 13
percent, increase losses for non-profitable banks by 3 to 6 percent and
reduce the industry's aggregate year-end capital approximately 0.7
percent. A survey of ICBA members reveals this estimate is much too
low. Thirty-two percent of community banks estimate the special
assessment will consume 16-25 percent of their 2009 earnings; 17
percent estimate it will consume 26-40 percent.
Community banks are being unfairly penalized with this assessment.
They did not participate in the risky practices engaged in by large
Wall Street institutions that led to the economic crisis, yet they are
being penalized by having to pay this onerous special assessment.
ICBA urges the FDIC to seek alternatives to the special assessment,
such as borrowing from Treasury or the industry or issuing bonds, to
temporarily fund the DIF, with the industry repaying the amount
borrowed, with interest. The DIF will still be industry-funded if the
FDIC uses its borrowing authority, but the industry would be able to
spread the cost of funding the DIF over time. In addition, the FDIC
should seek to shift the cost of replenishing the DIF to those
institutions responsible for the economic crisis and away from
community banks.
ICBA supports the Depositor Protection Act of 2009, S. 541
introduced by Banking Committee Chairman Dodd, Senator Crapo and
others. The bill would increase the FDIC's standby line of credit with
the Treasury from $30 billion to $100 billion. S. 541 would also
temporarily allow the FDIC to borrow up to $500 billion with the
concurrence of the Federal Reserve and the Secretary of the Treasury,
in consultation with the President. According to FDIC Chairman Bair,
the increased borrowing authority under S. 541 would allow the FDIC to
reduce this special assessment to as much as one-half of the proposed
rate.
ICBA appreciates Chairman Bair's commitment to a reduction in the
special assessment, if S. 541 becomes law. We are also encouraged by
reports that the FDIC may devote some fees received in connection with
its Temporary Liquidity Guarantee Program to shoring up the DIF now,
rather than waiting to transfer TLGP fees to the DIF at the end of the
TLGP. However, we still believe it is in the best interest of our
communities, if the FDIC were to find an alternative to the special
assessment in order to keep as much capital in the community banking
system for lending.
ICBA also urges the FDIC to use the asset-oriented assessment base
for all deposit insurance assessments, including any special
assessment, for the reasons cited above.
Coverage Levels
ICBA Supports Making the $250,000 Coverage Level Permanent
The Emergency Economic Stabilization Act temporarily increased
deposit insurance coverage from $100,000 to $250,000 through December
31, 2009. Community banks face stiff competition for deposits, the
primary source of community bank funding. The additional coverage has
not only bolstered depositor confidence in FDIC-insured institutions,
but it has helped community banks compete for deposits against ``too
big to fail'' banks and money market mutual funds. The additional
coverage has helped community banks be a part of solution to the credit
crisis caused in large part by the activities of larger financial
institutions. ICBA supports provisions in H.R. 1106, the Helping
Families Save Their Homes Act of 2009 to make the increase permanent.
ICBA Supports Covering All Amounts in Transaction Accounts Permanently
As part of the FDIC's efforts to promote stability and liquidity in
banks, the agency established an optional guarantee of all amounts
above $250,000 in transaction accounts in FDIC-insured institutions
under its Temporary Liquidity Guarantee Program (TLGP). The program
provides a guarantee of all sums in non-interest bearing transactions
accounts and very-low interest transactions accounts (interest at not
more than 50 basis points per annum). More than 6,000 banks, including
thousands of community banks, have chosen to participate in this
program.
The program, like the $250,000 insurance level, has been a useful
tool for community banks competing with larger banks--including the
``too big to fail'' banks--for commercial deposits.
Participation in the program also frees up capital and resources
used by community banks to purchase Treasuries and other securities for
repurchase agreements that secure commercial and public deposits.
Community banks can use the freed up resources to promote lending in
their communities. ICBA urges Congress to include permanent unlimited
coverage for non- and low-interest bearing transaction accounts in
deposit insurance legislation.
ICBA Supports a Fairer Assessment Method under Systemic Risk Provisions
H.R. 1106 addresses another issue ICBA has raised with respect to
the FDIC's TLGP. The FDIC used its systemic risk authority to establish
the TLGP. The net costs of any activity under the systemic risk
authority must eventually be borne by all FDIC-insured banks and
thrifts through an assessment based on the institutions' assets minus
equity. The statute does not expressly authorize the FDIC to assess
non-bank and non-thrift affiliates, including holding companies. The
Debt Guarantee portion of the TLGP has been extended to holding
companies because much of the bank debt is issued at the holding
company level. However, should a special assessment be needed to make
up for any deficit in the TLGP, the FDIC cannot levy an assessment
against the non-bank assets of a holding company. H.R. 1106 would allow
the FDIC to ensure holding companies with significant non-bank assets
pay their fair share of any deficit in the TLGP. ICBA appreciates the
support of the FDIC for this provision. We urge the Senate to include
this change in any deposit insurance legislation.
Mandatory Rebates
The letter of invitation asks us to address mandatory rebates in
the FDIC deposit insurance system. The 2006 deposit insurance reform
legislation requires the FDIC to refund one-half of all amounts in the
DIF in excess of the amount needed to keep the DIF's reserve ratio at
1.35 percent (and all of the excess over 1.50 percent). The legislation
also gives the FDIC flexibility by allowing the FDIC to suspend a
refund (i.e., rebate), if the FDIC finds there is a significant risk of
loss to the fund within the next year. Since under the FDIC's
restoration plan the DIF would not reach a 1.15 percent reserve ratio
until 7 years from now, at the earliest, ICBA does not believe the
rebate provisions are a near-term issue. At some later point, it could
be appropriate for Congress to reexamine these provisions. We note the
rebate provisions have never been implemented because the DIF has not
been at the trigger levels since the 2006 legislation was adopted.
Conclusion
Congress should address current inequities in the deposit insurance
system that put community banks at a competitive disadvantage. Congress
should adopt asystemic risk premium to compensate for the risk ``too
big to fail'' banks create for taxpayers and the FDIC. Congress should
require a fairer assessment base for deposit insurance by requiring
assessments against bank assets minus tangible equity.
In addition, the Senate should adopt the increase in borrowing
authority provided to the FDIC by S. 541. This would allow the FDIC
more flexibility to recapitalize the DIF and avoid a special
assessment. The Senate should make permanent the increase in deposit
insurance limits to $250,000 and make the unlimited guarantee of
transactions accounts permanent. These increases in coverage have
helped bolster depositor confidence and helped community banks compete
with ``too big to fail'' banks and money market mutual funds. The
Senate should also adopt the fairer method for assessing for deficits
in the FDIC's TLGP found in H.R. 1106. These provisions in H.R. 1106
will ensure holding companies with significant non-bank assets pay
their fair share of any deficit.
ICBA appreciates the opportunity to testify today, and looks
forward to working with this Committee on these vital issues.
______
PREPARED STATEMENT OF DAVID J. WRIGHT
CEO, Services Center Federal Credit Union,
on behalf of The National Association of Federal Credit Unions
March 19, 2009
Introduction
Good afternoon, Chairman Johnson, Ranking Member Crapo and Members
of the Subcommittee. My name is David Wright and I am testifying today
on behalf of the National Association of Federal Credit Unions (NAFCU).
I serve as the CEO of Services Center Federal Credit Union,
headquartered in Yankton, South Dakota. I have been CEO of Services
Center FCU for the last 33 years. Services Center FCU is a low-income
designated credit union operating in six counties. Four of the counties
are in southeastern South Dakota and two are in northeastern Nebraska.
This is a very rural part of the country. One of the counties has an
average population of just 6 people per square mile. My credit union
has some 6,200 members and assets of $37.5 million. Services Center FCU
was selected as NAFCU's Credit Union of the year in 1990 and again in
2008.
I was selected as NAFCU's credit union professional of the year in
1993 and have served on numerous committees for the association,
including the NAFCU Awards Committee, Membership Committee and Regional
Advisory Committee.
NAFCU is the only national organization exclusively representing
the interests of the nation's federally chartered credit unions. NAFCU-
member credit unions collectively account for approximately 65.4
percent of the assets of all federally chartered credit unions. NAFCU
and the entire credit union community appreciate the opportunity to
participate in this discussion regarding deposit insurance issues for
America's credit unions.
Historically, credit unions have served a unique function in the
delivery of necessary financial services to Americans. Established by
an act of Congress in 1934, the Federal credit union system was
created, and has been recognized, as a way to promote thrift and to
make financial services available to all Americans, many of whom would
otherwise have limited access to financial services. Congress
established credit unions as an alternative to banks and to meet a
precise public need-a niche that credit unions fill today for nearly 89
million Americans. Every credit union is a cooperative institution
organized ``for the purpose of promoting thrift among its members and
creating a source of credit for provident or productive purposes.'' (12
USC 1752(1)). While nearly 75 years have passed since the Federal
Credit Union Act (FCUA) was signed into law, two fundamental principles
regarding the operation of credit unions remain every bit as important
today as in 1934:
credit unions remain totally committed to providing their
members with efficient, low-cost, personal financial service;
and,
credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism.
Credit unions are not banks. The nation's approximately 7,800 federally
insured credit unions serve a different purpose and have a
fundamentally different structure than banks. Credit unions exist
solely for the purpose of providing financial services to their
members, while banks aim to make a profit for a limited number of
shareholders. As owners of cooperative financial institutions united by
a common bond, all credit union members have an equal say in the
operation of their credit union--``one member, one vote''--regardless
of the dollar amount they have on account. These singular rights extend
all the way from making basic operating decisions, to electing the
board of directors--something unheard of among for-profit, stock-owned
banks. Unlike their counterparts at banks and thrifts, Federal credit
union directors generally serve without remuneration--a fact
epitomizing the true ``volunteer spirit'' permeating the credit union
community.
Credit unions have grown steadily in membership and assets, but in
relative terms, they make up a small portion of the financial services
marketplace. Federally insured credit unions have approximately $813.4
billion in assets as of year-end 2008. By contrast, Federal Deposit
Insurance Corporation (FDIC) insured institutions held $13.9 trillion
in assets and last year grew by an amount that exceeds the total assets
of credit unions. The average size of a Federal credit union is $92.5
million compared with $1.673 billion for banks. Over 3,200 credit
unions have less than $10 million in assets. The credit union share of
total household financial assets is also relatively small, just 1.4
percent as of December 2008.
Size has no bearing on a credit union's structure or adherence to
the credit union philosophy of service to members and the community.
While credit unions may have grown, their relative size is still small
compared with banks. Even the world's largest credit union, with $36.4
billion in assets, is dwarfed by the nation's biggest banks with
trillions of dollars in assets.
America's credit unions have always remained true to their original
mission of ``promoting thrift'' and providing ``a source of credit for
provident or productive purposes.'' In fact, Congress acknowledged this
point when it adopted the Credit Union Membership Access Act (CUMAA--
P.L. 105-219) a decade ago. In the ``findings'' section of that law,
Congress declared that, ``The American credit union movement began as a
cooperative effort to serve the productive and provident credit needs
of individuals of modest means . . . [and it] continue[s] to fulfill
this public purpose.''
Credit unions continue to play a very important role in the lives
of millions of Americans from all walks of life. As consolidation of
the commercial banking sector has progressed with the resulting
depersonalization in the delivery of financial services by banks, the
emphasis in consumers' minds has begun to shift not only to services
provided but also--more importantly--to quality and cost. Credit unions
are second to none in providing their members with quality personal
financial service at the lowest possible cost.
While the lending practices of many other financial institutions
led to the nation's subprime mortgage debacle, data collected under the
Home Mortgage Disclosure Act (HMDA) illustrates the value of credit
unions to their communities. The difference between credit unions and
banks is highlighted when one examines the 2007 HMDA data for loans to
minority applicants with household incomes under $40,000. According to
the 2007 HMDA data, banks have a significantly higher percentage of
mortgage purchase loans (20.8 percent) charging at least 3 percent
higher than the comparable Treasury yield for minority applicants with
household income under $40,000. Credit unions, on the other hand, had
only 4.4 percent of their loans in that category.
The National Credit Union Share Insurance Fund (NCUSIF)
I am pleased to share with the Subcommittee NAFCU's assessment of
how the National Credit Union Share Insurance Fund (NCUSIF) is
structured, and our thoughts on current issues in deposit insurance.
As you may know, the primary reason credit unions came together in
1967 and formed NAFCU was to lobby Congress for the establishment of a
Federal insurance fund for credit unions--a goal that was realized in
1970. Like the credit unions whose accounts it insures, the NCUSIF is
itself cooperative in nature. Unlike FDIC insurance, which was
initially funded with taxpayer dollars from the United States Treasury
as seed-money, every dollar that has gone into the NCUSIF since its
inception has come solely from the credit unions it insures.
The NCUSIF was originally structured in the same manner as the
FDIC, i.e., the source of funding was based on premium collected from
insured institutions. In 1985 the amount of money at NCUSIF began to
dwindle because of mounting losses, low earnings on investments and
extensive growth in credit union insured savings. Credit unions
realized that NCUSIF needed to be recapitalized and in 1985 every
insured credit union made a deposit of 1 percent of its members insured
savings to NCUSIF. By making this deposit, the mutual or cooperative
structure of NCUSIF began. As of January 2009 NCUSIF has $7.5 billion
in total assets with a total equity of $7.3 billion. As a percentage of
total insured savings NCUSIF has an equity ratio of 1.28 percent.
Credit unions insured by the NCUSIF are required by statute to
maintain a deposit equal to 1 percent of its insured shares in the
insurance fund (12 USC 1782(c)(1)(A)(i)). This ``insurance deposit'' is
adjusted annually in the case of a credit union with total assets of
not more than $50 million, and semi-annually for those credit unions
with total assets of $50 million or more (12 USC 1782(c)(1)(A)(iii)).
The National Credit Union Administration (NCUA) Board has a statutory
obligation to establish a ``normal operating level'' for the fund which
``shall not be less than 1.2 percent and not more than 1.5 percent''
(12 USC 1782(h)(4)). If the equity level of the NCUSIF is in the 1.2
percent to 1.3 percent range, the NCUA Board may assess a premium in
order to restore the equity level back to the normal operating level.
If it falls below 1.2 percent, the statutory floor, the NCUA Board is
required to assess an insurance premium to restore the fund to a 1.2
percent equity level (12 USC 1782(c)(2)(C)).
While the NCUSIF is now fundamentally structured differently than
FDIC insurance, we believe it is imperative that there be parity in
coverage levels between the two funds. Failure to do so could create
public confusion and concern over the safety of their deposits and
destabilize the current system. We believe that an important aspect of
this parity has to include giving the NCUA the authority it needs to
take actions to maintain the stability of the fund.
Current Challenges in Deposit Insurance
As part of the Emergency Economic Stabilization Act of 2008,
Congress increased the coverage on FDIC and NCUSIF insured accounts to
$250,000 through December 31, 2009. This change serves to maintain
public confidence in insured depository institutions in the current
economic environment. This temporary increase prohibited the NCUA from
using this higher amount to calculate any insurance premiums. NAFCU
urges the Senate to enact legislation to permanently extend this
increase. Failure to do so could lead to decreased confidence in
financial institutions and lead people to withdraw funds, creating
additional challenges for financial institutions.
While credit unions have faired better than most financial
institutions in these turbulent economic times, many have been
impacted, through no fault of their own, by the current economic
environment.
In particular, the corporate credit union system has felt the
biggest impact. In examining the corporates, NCUA notes that, ``Nearly
80 percent of the securities held in the corporate credit union system
remain highly rated, but a portion of the securities has been
downgraded below investment grade due to underlying collateral
performance.'' The expected losses from these investments by corporate
credit unions are approximately $4.7 billion. It is with these facts in
mind that on January 28, 2009, the NCUA Board approved a series of
actions regarding the corporate credit union system.
Among the actions taken, NCUA:
Guaranteed the uninsured shares of ``all'' corporate credit
unions through February 2009 and established a voluntary
guarantee program for the uninsured shares of 23 corporate
credit unions through December 31, 2010 (the guarantee will
cover all shares, but does not include paid in capital and
membership capital accounts);
Issued a $1 billion capital note to U.S. Central Federal
Credit Union;
Issued an Advance Notice of Proposed Rulemaking (ANPR) on
restructuring the corporate credit union system; and,
Will be declaring a premium assessment to restore the
NCUSIF equity ratio to 1.30 percent, to be collected in late
2009.
The resulting impact on NCUSIF will be approximately $4.7 billion,
dropping the NCUSIF's equity ratio from the current 1.28 percent equity
ratio (as of January 2009) to an estimated 0.49 percent. Because credit
unions follow GAAP accounting there was an immediate impairment to the
1 percent deposit. FICUs had to recognize this impairment by setting
aside enough money in a contingency liability account to bring the
deposit at NCUSIF back to 1 percent level. As previously noted, the
FCUA requires NCUA to assess a premium when the fund's equity ratio
drops below 1.2 percent. That premium assessment must occur before the
end of 2009 and NCUA intends to bring the NCUSIF equity ratio up to
1.30 percent by assessing a premium of 0.3 percent later this year. As
part of the same actions on January 28th, NCUA also announced a
systematic review of the $64 billion in mortgage backed securities held
by corporate credit unions in order to refine the ultimate liability
and subsequent charge to each credit union. That review was recently
completed, but results have not yet been made public.
The consequence is that over 5,350 federally insured credit unions
(approximately 68.6 percent of all FICUs) will be in the ``red'' in
2009. Approximately 203 FICUs will be downgraded in PCA (Prompt
Corrective Action) levels, which could lead to further NCUA actions to
help stabilize those institutions.
NAFCU's analysis of 4th quarter call report data on credit unions
indicates that, absent legislation, FICU member services will be
adversely impacted in 2009. Such adverse impacts could include
increased fees, higher rates, lower dividends, and/or decreased
lending. In fact, as FICUs will suffer a reduction in $4.7 billion in
capital in 2009, the impact on consumer and business lending alone
(based on NCUA estimates that credit unions make approximately $7 worth
of loans for every $1 in capital) could total $33B, further adversely
impacting the economy as the Nation strives to rebound from its
economic malaise.
Proposed modifications to the NCUSIF
NAFCU urges the Senate to enact an amendment that would amend the
FCUA to establish a restoration plan period for the NCUSIF. This would
provide the NCUA Board with the authority to replenish the NCUSIF by
restoring the equity ratio through a restoration plan which is
consistent with the Federal Deposit Insurance Act and could extend the
replenishment over a period of up to 8 years versus the current 1-year
timeframe. H.R. 1106 included such an amendment that would extend the
repayment period over 5 years. Such an amendment would allow NCUA to
assess premiums over 8 years to restore the fund from an equity ratio
of 1.0 percent to 1.3 percent. Because credit unions must follow GAAP,
and it is an impairment, restoration of the fund to the 1.0 percent
deposit must, however, still occur in the same year.
NAFCU also strongly urges the Senate to provide the NCUSIF an
increase in borrowing authority from the Treasury Department. This
change is long due since the current level of $100 million was
established in 1971, and has not been modified for the growth of credit
unions and their member deposits over time. H.R. 1106 would increase
the borrowing authority to $6B.
Furthermore, NAFCU encourages the Senate to provide systemic risk
authority to NCUA, on a similar basis to that provided to FDIC. This
would be a very important step to address systemic emergencies when the
authority provided under Section 208 of the FCUA is inadequate. The
FDIC has pointed out specific provisions in its Act to provide
unlimited deposit insurance coverage for non-interest bearing
transaction accounts. Providing NCUA with parallel authority to the
FDIC to address systemic risk under extreme circumstances is an
important step to provide consumer confidence in these very challenging
economic times.
NAFCU believes that the NCUA and Congress should work to find
additional ways to help stabilize the corporate credit union system
outside of using the NCUSIF. One such approach could be to use the
Central Liquidity Facility (CLF) for credit unions. Established by the
FCUA and funded by Congress, the CLF provides loans to natural-person
credit unions to meet their liquidity needs in turbulent times. We
believe some changes to the FCUA to allow the CLF to help the corporate
credit union system could help address the current situation, and
provide relief from the current pressure NCUA's actions have had on the
NCUSIF. In particular, NAFCU supports an amendment to the FCUA which
would allow the NCUA to use funds from the CLF directly to help the
liquidity and capital needs of all credit unions, including corporate
credit unions. This change, if coupled with some form of flexibility on
OTTI accounting, would go a long way to helping credit unions. We would
welcome the opportunity to work with the Committee to address this
issue. Some suggested language to accomplish this is outlined below.
Proposed Amendments to the Federal Credit Union Act (12 U.S.C.
Sec. Sec. 1751-1795)
Section 1795
The Congress finds that the establishment of a National Credit
Union Central Liquidity Facility is needed to improve general financial
stability by meeting the liquidity and capital needs of credit unions,
and thereby encourage savings, support consumer and mortgage lending,
and provide basic financial resources to all segments of the economy.
Section 1795a
(1) ``liquidity needs'' means the needs of credit unions primarily
serving natural persons for--
(3) . . . Reserves shall not be considered as part of surplus;
(4) ``member'' means a Regular or an Agent member of the Facility;
and
(5) ``capital needs'' means cash available necessary to meet the
needs of credit unions--
(A) to increase net worth or capital; and
(B) to stabilize the credit union system, as determined by the
Board.
Section 1795c:
Membership.--(a) A credit union primarily serving natural persons
may be a Regular member . . . ''
Section 1795e
Extension of Credit Provision of funds.
(a)(1) A member may apply for an extension of credit from the
Facility to meet its liquidity needs. The Board shall approve or deny
any such application within five working days after receiving it. The
Board shall not approve an application for credit the intent of which
is to expand credit union portfolios. The Board may advance funds to
the member on terms and conditions prescribed by the Board after giving
due consideration to creditworthiness.
(2) A member may apply for the advancement of funds by the
Facility to meet its capital needs under such terms and conditions as
the Board shall prescribe to allow the funds to be categorized as net
worth or capital.
Additional Section of the Legislation
Recoupment.
Upon the expiration of the 5-year period beginning upon the date of
the enactment of this Act, the National Credit Union Administration
Board shall:
(a) submit a report to Congress on the utilization of the authority
conveyed by Section 1795e(a)(2) of the Federal Credit Union
Act; and
(b) establish a plan under Board regulations implementing this
section, to recoup, over a period of time, necessary amounts to
ensure that Section 1795e(a)(2) does not add to the deficit or
national debt.
Conclusion
In conclusion, NAFCU continues to support an independent NCUSIF.
Furthermore, we believe Congress must make the temporary increase in
deposit insurance coverage to $250,000 permanent. Actions by the NCUA
to help stabilize the corporate credit union system using the NCUSIF
threaten to put a strain on natural-person credit unions. We believe
legislative relief in the form of extending the repayment time,
increasing borrowing authority for the NCUSIF and modification of the
FCUA as it relates to the CLF are all steps that will help the
continued stability of the NCUSIF. Thank you for the opportunity to
appear before the Subcommittee today, I welcome any questions that you
may have.